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IMPORTANT NOTICE
NOT FOR DISTRIBUTION TO ANY PERSON OR ADDRESS IN THE UNITED STATES, THIS OFFERINGIS AVAILABLE ONLY TO INVESTORS WHO ARE ADDRESSEES OUTSIDE OF THE UNITED STATES.
IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies tothe attached offering circular (the ‘‘Offering Circular’’). You are advised to read this disclaimer carefully beforeaccessing, reading or making any other use of the attached Offering Circular. In accessing the attached OfferingCircular, you agree to be bound by the following terms and conditions, including any modifications to them fromtime to time, each time you receive any information from us as a result of such access.
Confirmation of Your Representation: This Offering Circular is being sent to you at your request and byaccepting the e-mail and accessing the attached Offering Circular, you shall be deemed to represent to ProvenHonour Capital Limited (the ‘‘Issuer’’), Huawei Investment & Holding Co., Ltd. (the ‘‘Guarantor’’) and each ofAustralia and New Zealand Banking Group Limited, Bank of China (Hong Kong) Limited, DBS Bank Ltd., INGBank N.V., Singapore Branch and Standard Chartered Bank as joint lead managers and joint bookrunners (togetherthe ‘‘Joint Lead Managers’’) that (1) you and any customers you represent are not located in the United States (asdefined in Regulation S under the United States Securities Act of 1933, as amended (the ‘‘Securities Act’’)) and thee-mail address that you gave us and to which this e-mail has been delivered is not located in the United States, and(2) you consent to delivery of the attached Offering Circular and any amendments or supplements thereto byelectronic transmission.
The attached Offering Circular has been made available to you in electronic form. You are reminded that documentstransmitted via this medium may be altered or changed during the process of transmission and consequently none ofthe Issuer, the Guarantor or any of the Joint Lead Managers or any of their respective affiliates, directors, officers,employees, representatives, agents and each person who controls the Issuer, the Guarantor, the Joint Lead Managersor any of their respective affiliates accepts any liability or responsibility whatsoever in respect of any discrepanciesbetween the document distributed to you in electronic format and the hard copy version. We will provide a hardcopy version to you upon request.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FORSALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DOSO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THESECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OROTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THEUNITED STATES. THIS OFFERING IS MADE SOLELY OUTSIDE OF THE UNITED STATES INOFFSHORE TRANSACTIONS PURSUANT TO REGULATION S UNDER THE SECURITIES ACT.
Nothing in this electronic transmission constitutes an offer or an invitation by or on behalf of any of the Issuer, theGuarantor of the securities or the Joint Lead Managers to subscribe for or purchase any of the securities describedtherein, and access has been limited so that it shall not constitute in the United States or elsewhere a generalsolicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or directedselling efforts (within the meaning of Regulation S under the Securities Act). If a jurisdiction requires that theoffering be made by a licensed broker or dealer and the Joint Lead Managers or any of their respective affiliates is alicensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by it or such affiliate onbehalf of the Issuer and the Guarantor in such jurisdiction.
You are reminded that you have accessed the attached Offering Circular on the basis that you are a person intowhose possession this Offering Circular may be lawfully delivered in accordance with the laws of the jurisdiction inwhich you are located and you may not nor are you authorised to deliver this document, electronically or otherwise,to any other person. If you have gained access to this transmission contrary to the foregoing restrictions, you are notallowed to purchase any of the securities described in the attached.
Actions that You May Not Take: If you receive this document by e-mail, you should not reply by e-mail to thisannouncement, and you may not purchase any securities by doing so. Any reply e-mail communications, includingthose you generate by using the ‘‘Reply’’ function on your e-mail software, will be ignored or rejected.
YOU ARE NOT AUTHORISED TO AND YOU MAY NOT FORWARD OR DELIVER THE ATTACHEDOFFERING CIRCULAR, ELECTRONICALLY OR OTHERWISE, TO ANY OTHER PERSON ORREPRODUCE SUCH OFFERING CIRCULAR IN ANY MANNER WHATSOEVER. ANY FORWARDING,DISTRIBUTION OR REPRODUCTION OF THE ATTACHED OFFERING CIRCULAR IN WHOLE OR INPART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN AVIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.
You are responsible for protecting against viruses and other destructive items. If you receive this document by e-mail, your use of this e-mail is at your own risk and it is your responsibility to take precautions to ensure that it isfree from viruses and other items of a destructive nature.
PROVEN HONOUR CAPITAL LIMITED(incorporated with limited liability in the British Virgin Islands)
US$1,000,000,000 4.125 PER CENT. GUARANTEED BONDS DUE 2025Unconditionally and Irrevocably Guaranteed by
HUAWEI INVESTMENT & HOLDING CO., LTD.(incorporated with limited liability in the People’s Republic of China)
ISSUE PRICE: 99.006 per cent.
The 4.125 per cent. guaranteed bonds due 2025 in the aggregate principal amount of US$1,000,000,000 (the ‘‘Bonds’’) will be issued by ProvenHonour Capital Limited (the ‘‘Issuer’’) and will be unconditionally and irrevocably guaranteed (the ‘‘Guarantee’’) by Huawei Investment & HoldingCo., Ltd. (the ‘‘Guarantor’’). The Issuer is a wholly-owned subsidiary of the Guarantor.
The Bonds will constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 5) unsecured obligations of the Issuer and(subject to stated above) rank and will rank pari passu, without any preference among themselves, with all other outstanding unsecured andunsubordinated obligations of the Issuer, present and future, but, in the event of insolvency, only to the extent permitted by applicable laws relatingto creditors’ rights.
The obligations of the Guarantor under the Guarantee constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 5)unsecured obligations of the Guarantor and (subject as stated above) rank and will rank pari passu with all other outstanding unsecured andunsubordinated obligations of the Guarantor, present and future, but, in the event of insolvency, only to the extent permitted by applicable lawsrelating to creditors’ rights.
The Bonds will bear interest on their outstanding principal amount from and including 19 May 2015 (the ‘‘Issue Date’’) at the rate of 4.125 per cent.per annum payable semi-annually in arrear in equal instalments on 19 May and 19 November in each year (each an ‘‘Interest Payment Date’’).Payments on the Bonds will be made free and clear of, and without withholding or deduction for, or on account of, any present or future taxes,duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of the British Virgin Islands or the PRC (asdefined herein) to the extent described under ‘‘Conditions of the Bonds – Taxation’’.
The Bonds mature on 19 May 2025 at their principal amount. The Bonds are subject to redemption, all but not some only, at their principal amount,together with accrued interest, at the option of the Issuer at any time in the event of certain changes affecting taxes of the British Virgin Islands orthe PRC. See ‘‘Conditions of the Bonds – Redemption and Purchase – Redemption for Taxation Reasons’’. All, or some only, of a Bondholder’sBonds may also be redeemed on the Put Settlement Date (as defined in the terms and conditions of the Bonds (the ‘‘Conditions of the Bonds’’)) atthe option of such Bondholder, following the occurrence of a Relevant Event (as defined in the Conditions of the Bonds), at (i) 101 per cent. of theirprincipal amount (in the case of a redemption for a Change of Control (as defined in the Conditions of the Bonds)) or (ii) 100 per cent. of theirprincipal amount (in the case of a redemption for a No Registration Event (as defined in the Conditions of the Bonds)), together, in each case, withaccrued interest to the Put Settlement Date. See ‘‘Conditions of the Bonds – Redemption and Purchase – Redemption upon Relevant Event’’. TheBonds may also be redeemed at the option of the Issuer in whole or in part at any time at a price equal to their Make Whole Amount together withaccrued interest but unpaid to the date fixed for redemption (collectively, the ‘‘Make Whole Redemption Price’’) on the Issuer giving not less than30 nor more than 60 days notice to the Bondholders. See ‘‘Conditions of the Bonds – Redemption and Purchase – Redemption at the option of theIssuer’’.
The Guarantor undertakes that it will (a) register or cause to be registered with SAFE (as defined in the Conditions of the Bonds) the Guarantee inaccordance with, and within the time period prescribed by, the Foreign Exchange Administration Rules on Cross-border Security(跨境擔保外匯管理
規定)(the ‘‘Cross-border Security Registration’’), (b) use all reasonable endeavours to complete the Cross-border Security Registration and obtaina registration record from SAFE (or any other document evidencing the completion of registration issued by SAFE) on or before the RegistrationDeadline (being the day falling 90 days after the Issue Date) and (c) comply with all applicable PRC laws and regulations in relation to theGuarantee.
Application will be made to The Stock Exchange of Hong Kong Limited (the ‘‘Hong Kong Stock Exchange’’) for the listing of, and permission todeal in, the Bonds by way of debt issues to professional investors (as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong) onlyand such permission is expected to become effective on or about 20 May 2015.
Investing in the Bonds involves certain risks. See ‘‘Risk Factors’’ beginning on page 16 for a discussion of certain factors to be considered inconnection with an investment in the Bonds.
The Bonds and the Guarantee have not been and will not be registered under the United States Securities Act of 1933, as amended (the"Securities Act") and, subject to certain exceptions, may not be offered or sold within the United States (as defined in Regulation S under theSecurities Act ("Regulation S")). The Bonds are being offered only outside the United States in reliance on Regulation S.
For a description of these and certain further restrictions on offers and sales of the Bonds and the distribution of this Offering Circular, see‘‘Subscription and Sale’’.
The Bonds have not been and will not be rated.
The Bonds will be issued in registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof. The Bonds willbe represented by beneficial interests in a global certificate (the ‘‘Global Certificate’’) in registered form which will be registered in the name of anominee of, and shall be deposited on or about the Issue Date with, a common depositary for Euroclear Bank S.A./N.V.(‘‘Euroclear’’) andClearstream, Banking, société anonyme (‘‘Clearstream, Luxembourg’’, and together with Euroclear, the ‘‘Clearing Systems’’). Beneficial interestsin the Global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream,Luxembourg. Except as described herein, definitive certificates for Bonds will not be issued in exchange for interests in the Global Certificate.
Joint Lead Managers and Joint Bookrunners
ANZBank of China(Hong Kong) DBS Bank Ltd. ING
StandardChartered Bank
Offering Circular dated 12 May 2015
NOTICE TO INVESTORS
Each of the Issuer and the Guarantor, having made all reasonable enquiries, confirms that (i) thisOffering Circular contains all material information with respect to the Issuer, the Guarantor and itssubsidiaries (collectively, the ‘‘Group’’), the Bonds and the Guarantee (including all information which,according to the particular nature of the Issuer, the Guarantor, the Group, the Bonds and the Guarantee,is necessary to enable investors to make an informed assessment of the assets and liabilities, financialposition, profits and losses and prospects of the Issuer, the Guarantor and the Group and of the rightsattaching to the Bonds and the Guarantee), (ii) the statements contained in this Offering Circular relatingto the Issuer, the Guarantor and the Group are in every material respect true and accurate and notmisleading, (iii) the statements of intention, opinion, belief or expectation contained in this OfferingCircular with regard to the Issuer, the Guarantor and the Group are honestly and reasonably made orheld, (iv) there are no other facts in relation to the Issuer, the Guarantor, the Group, the Bonds or theGuarantee the omission of which would in the context of the issue of the Bonds make any statement inthis Offering Circular misleading and (v) all reasonable enquiries have been made by the Issuer and theGuarantor to ascertain such facts and to verify the accuracy of all such statements.
This Offering Circular has been prepared by the Issuer and the Guarantor solely for use in connectionwith the proposed offering of the Bonds described in this Offering Circular. The distribution of thisOffering Circular and the offering of the Bonds in certain jurisdictions may be restricted by law. Personsinto whose possession this Offering Circular comes are required by the Issuer, the Guarantor and theJoint Lead Managers (as defined herein) to inform themselves of and to observe any such restrictions.No action is being taken to permit a public offering of the Bonds or the distribution of this OfferingCircular in any jurisdiction where action would be required for such purposes. There are restrictions onthe offer and sale of the Bonds and the circulation of documents relating thereto in certain jurisdictionsincluding the United States, the United Kingdom, Singapore, Hong Kong, the PRC and the BritishVirgin Islands, and to persons connected therewith. For a description of certain further restrictions onoffers, sales and resales of the Bonds and distribution of this Offering Circular, see ‘‘Subscription andSale’’. This Offering Circular is personal to each offeree and does not constitute an offer to any otherperson or to the public generally to subscribe for or otherwise to acquire the Bonds. Distribution of thisOffering Circular to any other person other than the investors and any person retained to advise suchinvestors with respect to their purchase is unauthorised. Each investor, by accepting delivery of thisOffering Circular, agrees to the foregoing and to make no photocopies of this Offering Circular or anydocuments referred to in this Offering Circular.
This Offering Circular includes particulars given in compliance with the Rules Governing the Listing ofSecurities on the Hong Kong Stock Exchange (the ‘‘Listing Rules’’) for the purpose of givinginformation with regard to the Issuer, the Guarantor and the Group. The Issuer and the Guarantor acceptfull responsibility for the accuracy of the information contained in this Offering Circular and confirm,having made all reasonable enquiries, that to the best of their knowledge and belief there are no otherfacts the omission of which would make any statement herein misleading.
Hong Kong Exchanges and Clearing Limited and the Hong Kong Stock Exchange take no responsibilityfor the contents of this Offering Circular, make no representation as to its accuracy or completeness andexpressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon thewhole or any part of the contents of this Offering Circular.
No person has been or is authorised to give any information or to make any representation concerningthe Issuer, the Guarantor, the Group, the Bonds or the Guarantee other than as contained herein and, ifgiven or made, any such other information or representation should not be relied upon as having beenauthorised by the Issuer, the Guarantor, the Joint Lead Managers, the Trustee (as defined in theConditions of the Bonds), the Agents (as defined in the Conditions of the Bonds) or their respectiveaffiliates. Neither the delivery of this Offering Circular nor any offering, sale or delivery made inconnection with the issue of the Bonds shall, under any circumstances, constitute a representation thatthere has been no change or development reasonably likely to involve a change in the affairs of the
i
Issuer, the Guarantor, the Group or any of them since the date hereof or create any implication that theinformation contained herein is correct as at any date subsequent to the date hereof. This OfferingCircular does not constitute an offer of, or an invitation by or on behalf of the Issuer, the Guarantor, theJoint Lead Managers, the Trustee, the Agents or their respective affiliates to subscribe for or purchaseany of the Bonds and may not be used for the purpose of an offer to, or a solicitation by, anyone in anyjurisdiction or in any circumstances in which such offer or solicitation is not authorised or is unlawful.
This Offering Circular may not be copied or reproduced in whole or in part. It may be distributed onlyto and its contents may be disclosed only to the prospective investors to whom it is provided. Byaccepting delivery of this Offering Circular each investor agrees to these restrictions.
This Offering Circular is being furnished by the Issuer and the Guarantor in connection with the offeringof the Bonds exempt from registration under the Securities Act solely for the purpose of enabling aprospective investor to consider purchasing the Bonds. Investors must not use this Offering Circular forany other purpose, make copies of any part of this Offering Circular or give a copy of it to any otherperson, or disclose any information in this Offering Circular to any other person. The informationcontained in this Offering Circular has been provided by the Issuer, the Guarantor and other sourcesidentified in this Offering Circular. Any reproduction or distribution of this Offering Circular, in wholeor in part, and any disclosure of its contents or use of any information herein for any purpose other thanconsidering an investment in the Bonds offered by this Offering Circular is prohibited. Each offeree ofthe Bonds, by accepting delivery of this Offering Circular, agrees to the foregoing.
No representation or warranty, express or implied, is made or given by the Joint Lead Managers, theTrustee, the Agents or any of their respective affiliates as to the accuracy, completeness or sufficiencyof the information contained in this Offering Circular, and nothing contained in this Offering Circular is,or shall be relied upon as a promise, representation or warranty by the Joint Lead Managers, the Trustee,the Agents or any of their respective affiliates. To the fullest extent permitted by law, the Joint LeadManagers, the Trustee, the Agents and their respective affiliates do not accept any responsibility for thecontents of this Offering Circular or for any other statement, made or purported to be made by or onbehalf of the Joint Lead Managers, the Trustee, the Agents or any of their respective affiliates inconnection with the Issuer, the Guarantor, the Group, the Guarantee or the issue and offering of theBonds. Each of the Joint Lead Managers, the Trustee, the Agents and their respective affiliatesaccordingly disclaim all and any liability whether arising in tort or contract or otherwise which theymight otherwise have in respect of this Offering Circular or any such statement. None of the Joint LeadManagers, the Trustee, the Agents or any of their respective affiliates undertakes to review the financialcondition or affairs of the Issuer, the Guarantor or the Group after the date of this Offering Circular norto advise any investor or potential investor in the Bonds of any information coming to the attention ofthe Joint Lead Managers, the Trustee, the Agents or any of their respective affiliates. None of the JointLead Managers, the Trustee, the Agents or any of their respective affiliates has independently verifiedany of the information contained in this Offering Circular and can give no assurance that thisinformation is accurate, true or complete. This Offering Circular is not intended to provide the basis ofany credit or other evaluation nor should it be considered as a recommendation by any of the Issuer, theGuarantor, the Joint Lead Managers, the Trustee, the Agents or any of their respective affiliates that anyrecipient of this Offering Circular should purchase the Bonds. Each potential purchaser of the Bondsshould determine for itself the relevance of the information contained in this Offering Circular and itspurchase of the Bonds should be based upon such investigations with its own tax, legal and businessadvisers as it deems necessary.
In making an investment decision, investors must rely on their own examination of the Issuer, theGuarantor, the Group and the terms of the offering, including the merits and risks involved. See ‘‘RiskFactors’’ for a discussion of certain factors to be considered in connection with an investment in theBonds.
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Each person receiving this Offering Circular acknowledges that such person has not relied on the JointLead Managers, the Trustee, the Agents or any of their respective affiliates in connection with itsinvestigation of the accuracy of such information or its investment decision.
Investors are advised to read and understand the contents of this Offering Circular before investing. If indoubt, investors should consult their advisers.
IN CONNECTION WITH THE ISSUE OF THE BONDS, ANY OF THE JOINT LEADMANAGERS APPOINTED AND ACTING IN ITS CAPACITY AS STABILISING MANAGER(THE ‘‘STABILISING MANAGER’’) (OR PERSONS ACTING ON BEHALF OF THESTABILISING MANAGER) MAY, TO THE EXTENT PERMITTED BY APPLICABLE LAWSAND DIRECTIVES, OVER‑ALLOT THE BONDS OR EFFECT TRANSACTIONS WITH AVIEW TO SUPPORTING THE MARKET PRICE OF THE BONDS AT A LEVEL HIGHERTHAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NOASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OFTHE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANYSTABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATEPUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE BONDS IS MADE ANDSUCH STABILISING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME ANDMUST BE BROUGHT TO AN END AFTER A LIMITED PERIOD.
Listing of the Bonds on the Hong Kong Stock Exchange is not to be taken as an indication of the meritsof the Issuer, the Guarantor, the Group or the Bonds.
All non-company specific statistics and data relating to the Group’s industry or the economies ofpertinent jurisdictions, such as the PRC, have been extracted or derived from publicly availableinformation and various government sources. The Guarantor believes that the sources of this informationare appropriate for such information and the Guarantor has taken reasonable care in extracting andreproducing such information. The Guarantor has no reason to believe that such information is false ormisleading or that any fact has been omitted that would render such information false or misleading.However, this information has not been independently verified by the Issuer, the Guarantor, the JointLead Managers, the Trustee, the Agents or any of their respective affiliates and none of the Issuer, theGuarantor, the Joint Lead Managers, the Trustee, the Agents or any of their respective affiliates makeany representation as to the correctness, accuracy or completeness of that information. In addition, thirdparty information providers may have obtained information from market participants and suchinformation may not have been independently verified. Accordingly, such information should not beunduly relied upon.
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CERTAIN DEFINITIONS, CONVENTIONS AND CURRENCY PRESENTATION
In this Offering Circular, unless otherwise specified or the context otherwise requires, all references tothe ‘‘Group’’ and words of similar import are to Huawei Investment & Holding Co., Ltd. itself and itssubsidiaries, as the context requires. All references in this Offering Circular to ‘‘China’’ or the ‘‘PRC’’
are to the People’s Republic of China and, for the purpose of this Offering Circular only, excludingHong Kong, the Macau Special Administrative Region of the PRC and Taiwan, ‘‘US’’ or the ‘‘UnitedStates’’ are to the United States of America and all references to ‘‘Hong Kong’’ are to the Hong KongSpecial Administrative Region of China.
Solely for the sake of convenience, this Offering Circular contains translations of certain Renminbiamounts into US dollar amounts. Unless otherwise specified or the context requires, references herein to‘‘CNY’’, ‘‘RMB’’ or ‘‘Renminbi’’ are to the lawful currency of the PRC, references herein to ‘‘USD’’,‘‘US dollars’’, ‘‘U.S. dollars’’, ‘‘US$’’ or ‘‘U.S.$’’ are to the lawful currency of the United States ofAmerica and references herein to ‘‘EUR’’, ‘‘€’’ or ‘‘euro’’ are to the official currency of the Eurozone.For convenience and unless otherwise noted, all translations in this Offering Circular of Renminbiamounts into US dollar amounts have been made at the rate of RMB6.1958 to US$1.00, being themedian rates set by the People’s Bank of China, the central bank of the PRC (the ‘‘PBOC’’) for foreignexchange transactions prevailing on 31 December 2014.
The English names of the PRC nationals, entities, departments, facilities, laws, regulations, certificates,titles and the like are translations of their Chinese names and are included for identification purposesonly.
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PRESENTATION OF FINANCIAL INFORMATION
Huawei’s consolidated financial statements as at and for the years ended 31 December 2013 and 2014,which are included elsewhere in this Offering Circular, have been audited by KPMG Huazhen. Theconsolidated financial statements of Huawei as at and for the years ended 31 December 2013 and 2014have been prepared in accordance with IFRS.
Certain comparative amounts with respect to the year ended 31 December 2012 included in Huawei’sconsolidated financial statements as at and for the year ended 31 December 2013 (‘‘2013 FinancialStatements’’) have been restated to reflect the adoption of the revised International AccountingStandards 19, Employee benefits (‘‘Revised IAS 19’’). The change in accounting policy arising fromRevised IAS19 is the only change which has had a material impact on the comparative periods as set outin 2013 Financial Statements. This change in accounting policy has been applied retrospectively byrestating the opening balances at 1 January 2012 and 2013, with consequential adjustments tocomparatives for the year ended 31 December 2012. Therefore the consolidated financial information asat and for the year ended 31 December 2012 contained in Huawei’s 2013 Financial Statements which arecontained herein are not directly comparable with the comparative financial information for the yearended 31 December 2013 contained in Huawei’s 2013 Financial Statements contained herein. The detailsof the change in accounting policy resulting from the adoption of the Revised IAS19 have been set outin note 4 to the consolidated financial statements for the year ended 31 December 2013.
Certain comparative amounts with respect to the year ended 31 December 2013 included in Huawei’sconsolidated financial statements as at and for the year ended 31 December 2014 (‘‘2014 FinancialStatements’’) have been restated. In 2014, the management of Huawei had determined that certainoperating support activities in Huawei’s selling organisation, previously recorded as selling expenses,would be more appropriately presented as administrative expenses, and that the product managementactivities for product divisions, previously presented as selling expenses, should be changed to researchand development expenses to more accurately reflect their function. The management of Huawei alsofurther determined that certain cash received from customers would be more appropriately presented asadvances received within other payables, rather than being offset against the receivables due from thesame customers. Huawei’s senior management also adjusted the segment reporting solution based on thedevelopment of the business. The comparatives as at and for the year ended 31 December 2013 havebeen represented to comply with the presentation in 2014. These changes in presentation have had noimpact on reported operating profit or net assets. For more details, please see note 40 to Huawei’s 2014Financial Statements included elsewhere in this Offering Circular. Huawei’s financial information as atand for the year ended 31 December 2012 which is included in this Offering Circular has not beenrestated to reflect such reclassifications, restatements or amendments. Therefore the consolidatedfinancial information as at and for the year ended 31 December 2012 are not directly comparable toHuawei’s consolidated financial information as at and for the years ended 31 December 2013 and 2014contained in Huawei’s 2014 Financial Statements contained herein. For more details, please see thesection entitled ‘‘Risk Factors – Risks relating to Huawei’s Business and Industry – Huawei’s financialinformation as at and for the year ended 31 December 2012 regarding certain aspects has not beenrestated and may not be comparable to Huawei’s financial information as at and for the years ended 31December 2013 and 2014 contained in Huawei’s 2014 Financial Statements’’.
In this Offering Circular, where information has been presented in thousands or millions of units,amounts may have been rounded up or down. Accordingly, totals of columns or rows of numbers intables may not be equal to the apparent total of the individual items and actual numbers may differ fromthose contained herein due to rounding. References to information in billions of units are to theequivalent of a thousand million units.
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INDUSTRY DATA
Market data and certain industry forecasts and statistics in this Offering Circular have been obtainedfrom both public and private sources, including market research, publicly available information andindustry publications. Although this information is believed to be reliable, it has not been independentlyverified by the Issuer and the Guarantor, the Joint Lead Managers and their respective directors andadvisors, and neither the Issuer, the Guarantor, the Joint Lead Managers nor their respective directorsand advisors make any representation as to the accuracy or completeness of that information. Suchinformation may not be consistent with other information compiled within or outside the PRC. Inaddition, third party information providers may have obtained information from market participants andsuch information may not have been independently verified. In making an investment decision, eachinvestor must rely on its own examination of the Issuer and the Guarantor and the terms of the offeringand the Bonds, including the merits and risks involved.
All statements in this Offering Circular attributable to Gartner, IDC, Strategy Analytics or InfoneticsResearch represent Huawei’s interpretation of data, research opinion or viewpoints published as part of asyndicated subscription service by Gartner, IDC, Strategy Analytics or Infonetics Research and have notbeen reviewed by Gartner, IDC, Strategy Analytics or Infonetics Research. Each of Gartner’s, IDC’s,Strategy Analytics’s or Infonetics Research’s publication speaks as of its original publication date andnot as of the date of this Offering Circular. The opinions expressed in Gartner’s, IDC’s, StrategyAnalytics’s or Infonetics Research’s publications are not representations of fact and are subject to changewithout notice.
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FORWARD-LOOKING STATEMENTS
The Issuer and the Guarantor have made forward-looking statements in this Offering Circular regarding,among other things, Huawei’s financial conditions, future expansion plans and business strategy. Theseforward-looking statements are based on Huawei’s current expectations about future events, and arebased on numerous assumptions regarding its present and future business strategies and the environmentin which Huawei will operate in the future. Although the Issuer and the Guarantor believe that theseexpectations and projections are reasonable, such forward-looking statements are inherently subject torisks, uncertainties and assumptions, including, among other things:
• risks associated with general political, social and economic conditions globally, in the PRC andrelated to the industry;
• Huawei’s ability to manage working capital and operations-related expenditure requirements;
• Huawei’s ability to achieve its business strategies and plans of operation;
• Huawei’s ability to expand its sales and services network and the Group’s customer base;
• Huawei’s ability to innovate, develop, execute and commercialise new technologies, products andservices;
• expectations regarding market developments and structural changes;
• expectations and targets regarding Huawei’s industry volumes, market share, prices, net sales andmargins of products and services;
• expectations and targets regarding Huawei’s operational priorities and results of operations;
• expectations and targets regarding collaboration and partnering arrangements;
• foreign exchange controls and fluctuations in exchange rates and interest rates;
• certain government regulations, policies and other factors beyond Huawei’s control; and
• other factors, including those other risks identified in the ‘‘Risk Factors’’ section of this OfferingCircular.
The words ‘‘anticipate’’, ‘‘believe’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘plan’’ and similar expressionsare intended to identify a number of these forward-looking statements. However, these words are not theexclusive means of identifying forward-looking statements. Additional factors that could cause actualperformance or achievements to differ materially include, but are not limited to, those discussed under‘‘Risk Factors’’ and elsewhere in this Offering Circular. The Issuer and the Guarantor undertake noobligation to update or revise any forward-looking statements whether as a result of new information,future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-lookingevents discussed in this Offering Circular might not occur and the Guarantor’s and the Group’s actualresults could differ materially from those anticipated in these forward-looking statements. Accordingly,investors are cautioned not to place undue reliance on these forward-looking statements.
These forward-looking statements speak only as at the date of this Offering Circular. The Issuer and theGuarantor expressly disclaim any obligation or undertaking to release publicly any updates or revisionsto any forward-looking statement contained herein to reflect any change in the Group’s expectationswith regard thereto or any change of events, conditions or circumstances, on which any such statementwas based. All forward-looking statements contained in this Offering Circular are qualified by referenceto the cautionary statements in this section.
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CONTENTS
Page
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE ISSUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CONDITIONS OF THE BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SUMMARY OF PROVISIONS RELATING TO THE BONDS IN GLOBAL FORM . . . . . . . . . . . 61
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
EXCHANGE RATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
CAPITALISATION AND INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
DESCRIPTION OF THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
DESCRIPTION OF THE GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
DIRECTORS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
THE GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
THE SHAREHOLDING STRUCTURE OF THE GUARANTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
SUBSCRIPTION AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
viii
GLOSSARY
In this Offering Circular, unless the context indicates otherwise, the following terms have the respectivemeanings set forth below.
‘‘2012 Bonds’’ CNY1,000,000,000 5.30 per cent. bonds due 2015 issued on 18 May 2012
‘‘2014 Bonds’’ CNY1,600,000,000 4.55 per cent. guaranteed bonds due 2017 issued on23 September 2014
‘‘2G’’ Second generation mobile wireless telecommunications technology
‘‘3G’’ Third generation mobile wireless telecommunications technology
‘‘4G’’ Fourth generation mobile wireless telecommunications technology
‘‘5G’’ Fifth generation mobile wireless telecommunications technology
‘‘AC’’ Audit Committee
‘‘Alternative ClearingSystem’’
Any clearing system other than Euroclear, Clearstream and Luxembourg
‘‘Amending Directive’’ The Council Directive formally adopted by the Council of the EuropeanUnion on 24 March 2014
‘‘BCGs’’ Business Conduct Guidelines
‘‘BDII’’ Business-driven ICT infrastructure
‘‘BOD’’ The Board of Directors
‘‘BSSs’’ Business Support Systems
‘‘BVI’’ The British Virgin Islands
‘‘BYOD’’ Bring Your Own Device
‘‘CAGR’’ Compound Annual Growth Rate
‘‘CDMA’’ Code Division Multiple Access 2000
‘‘Commission’’ United States International Trade Commission
‘‘Commission’s Proposal’’ The proposal published on 14 February 2013 by the EuropeanCommission for a Directive for a common financial transactions tax inBelgium, Germany, Estonia, Greece, Spain, France, Italy, Austria,Portugal, Slovenia and Slovakia
‘‘COO’’ chief operating officer
‘‘CPE’’ Customer Premises Equipment
‘‘CRDU’’ Central Research & Development Unit
‘‘CSP’’ Communication Services Provider
1
‘‘D&P’’ Development and Pilot
‘‘EC’’ European Commission
‘‘EIT Law’’ The PRC Enterprise Income Tax Law
‘‘EMT’’ Executive Management Team
‘‘EPC’’ Evolved Packet Core
‘‘EVP’’ Executive Vice President
‘‘FC’’ Finance Committee
‘‘FSMA’’ Financial Services and Markets Act 2000
‘‘Futurewei’’ Futurewei Technologies Inc.
‘‘Gartner’’ Gartner, Inc., a leading information technology research and advisorycompany based in the United States
‘‘GDP’’ Gross Domestic Product
‘‘GPOs’’ Global Process Owners
‘‘GSM’’ Global System for Mobile Communications
‘‘HCIEs’’ Huawei Certified Internetwork Experts
‘‘Huawei’’ or ‘‘Group’’ Huawei Investment & Holding Co., Ltd. and its subsidiaries
‘‘Huawei Tech’’ Huawei Technologies Co., Ltd.
‘‘ICT’’ Information and Communication Technology
‘‘IDC’’ InterDigital Corporation
‘‘IFRS’’ International Financial Reporting Standards
‘‘Infonetics’’ Infonetics Research, an international market research and consulting firm
‘‘IoT’’ Internet of Things
‘‘IPCC’’ IP Contact Centre
‘‘ISS’’ Industry Standard Servers
‘‘IT’’ Information Technology
‘‘ITU’’ International Telecommunication Union
‘‘LTE’’ Long Term Evolution, a standard for wireless communication of high-speed data for mobile phones and data terminals
‘‘M2M’’ Machine-to-Machine
2
‘‘OSSs’’ Operations Support Systems
‘‘OTN’’ Optical Transport Network
‘‘R&D’’ Research and Development
‘‘Representatives’’ Representatives of shareholding employees
‘‘SAFE’’ State Administration of Foreign Exchange of China or its localcounterpart
‘‘SAFE Notice’’ Notice of the Promulgation of the Administrative Regulations on Cross-border Foreign Exchange Guarantees issued by the State Administrationof Foreign Exchange(國家外匯管理局關于發布《跨境擔保外匯管理規
定》的通知)on 12 May 2014
‘‘Scheme’’ Employee Shareholding Scheme
‘‘SDC’’ Strategy & Development Committee
‘‘SDN’’ Software-defined networking
‘‘SDPs’’ Service Delivery Platforms
‘‘SFA’’ Securities and Futures Act
‘‘SFO’’ Securities and Futures Ordinance of Hong Kong
‘‘SMBs’’ Small and Midsize Businesses
‘‘SPRS’’ Services Provider Routers & Switches
‘‘Strategy Analytics’’ Strategy Analytics, a global organisation conducting primary research andmanaging consulting projects
‘‘SZMG’’ Shenzhen Media Group
‘‘TBUs’’ Time-based units
‘‘TD-SCDMA’’ Time Division Synchronous Code Division Multiple Access
‘‘TPL’’ Technology Properties Limited LLC
‘‘TUP’’ Time-based Unit Plan
‘‘TVB’’ Television Broadcasts Limited
‘‘UC&C’’ Unified Communications and Collaboration
‘‘Union’’ The union of Huawei Investment & Holding Co., Ltd.
‘‘UMTS’’ Universal Mobile Telecommunication System
‘‘UPS’’ Uninterruptable Power Supply
3
‘‘USA Device’’ Huawei Device USA Inc.
‘‘USITC’’ United States International Trade Commission
‘‘VoLTE’’ Voice over Long Term Evolution
‘‘VGS’’ Value Growth Solution
‘‘VMs’’ Virtual Machines
‘‘WCDMA’’ Wideband Code Division Multiple Access
‘‘WDM’’ Wavelength Division Multiplexing
‘‘WLAN’’ Wireless Local Area Network
4
SUMMARY
The summary below is only intended to provide a limited overview of information described in moredetail elsewhere in this Offering Circular. As it is a summary, it does not contain all of the informationthat may be important to investors and terms defined elsewhere in this Offering Circular shall have thesame meanings when used in this summary. Prospective investors should therefore read this OfferingCircular in its entirety.
Overview
Huawei is a global leader of information and communications technology (‘‘ICT’’) solutions.Continuously innovating based on customer needs, Huawei is committed to enhancing customerexperiences and creating maximum value for telecom carriers, enterprises and consumers. Huawei’stelecom network equipment, IT products and solutions and smart devices are used in 170 countries andregions, serving over one-third of the world’s population. Huawei was ranked No. 285 among theFortune Global 500 in 2014 and employed approximately 170,000 people worldwide as at 31 December2014.
Huawei is committed to building a better connected world. By leveraging its experience and expertise inthe ICT sector, Huawei helps bridge the digital divide by providing opportunities to enjoy broadbandservices, regardless of geographic location.
Huawei currently operates in the following three business segments:
• Carrier Business: Develops and manufactures a wide range of wireless networks, fixed networks,global services, carrier software, core networks and network energy solutions fortelecommunication operators;
• Enterprise Business: Develops integratable ICT products and solutions including enterprisenetwork infrastructure, cloud-based green data centres, enterprise information security, unifiedcommunication and collaboration and delivers these solutions to vertical industries such asgovernments and public utilities, enterprises, energy, power, transportation and finance; and
• Consumer Business: Develops and manufactures mobile broadband devices, home devices,smartphones as well as the applications on these devices and delivers them to consumers andbusinesses.
While Huawei offers comprehensive products and services to the three distinct customer groups, itmanages and controls its main research, manufacturing, procurement, IT systems and administration on acentralised basis. Huawei has set up 16 research and development (‘‘R&D’’) centres in countries such asGermany, Sweden, the United States, India, Japan, Canada and China. As at 31 December 2014, Huaweihad approximately 76,000 R&D specialists, approximately 45% of its total workforce worldwide. Tocontribute to the sustainable development of society, the economy and the environment, Huawei hascreated a wide range of green solutions that enable consumers to reduce power consumption, carbonemissions and resource costs.
Huawei has experienced sustainable growth over the years and its revenue increased from RMB239,025million in 2013 to RMB288,197 million in 2014, representing a year-on-year growth of 20.6%. Huaweialso achieved steady profit growth in recent years and its net profit amounted to RMB21,003 millionand RMB27,866 million in 2013 and 2014, respectively.
5
Shareholding Structure
The following chart sets forth a simplified corporate and shareholding structure of Huawei as at 31December 2014:
Notes:
(1) Refers to the shareholding in Huawei held by Mr. Ren Zhengfei as an individual shareholder.
(2) Entities shaded in grey refer to the principal subsidiaries of Huawei.
Competitive Strengths
Huawei believes that its continuous business success is largely attributable to the following uniquecompetitive strengths:
• a global leading innovator with world-class R&D capabilities and cutting-edge technologies;
• a leading ICT solutions provider with global scale and leadership in multiple product segments;
• strong brand awareness with diversified and high-quality customer and supplier base;
• experienced and stable management team and highly motivated staff leading to continuousoperational efficiency improvement;
• global resources with local focus to rationalise cost structure and to successfully penetrate intoboth emerging and developed economies around the world; and
• robust credit profile and strong liquidity position supported by prudent risk management.
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Strategies
Huawei is committed to strengthening its market position as the leading global ICT infrastructuresupplier and solutions provider through the following strategies:
• focus on ‘‘Pipe Strategy’’ and manage business portfolio with effective growth;
• extend technological leadership through demand-driven innovations sustained by effectiveprocesses and management systems;
• continue to enhance operational efficiency through management improvement;
• implement ‘‘Glocalised’’ operations to fully combine the advantages of its global value chain withlocal innovation capabilities;
• building strategic alliances, cooperating with industry players and joining standards and opensource organisations to establish mutually beneficial collaboration and achieve sustainable industrydevelopment
• maintain a prudent and strong risk management policy;
• maintain a strong focus on corporate governance;
• place cyber security and user privacy protection above Huawei’s business interests; and
• continue to attract, incentivise and retain employees.
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THE ISSUE
The following contains summary information about the Bonds and is qualified in its entirety by theremainder of this Offering Circular. Some of the terms described below are subject to importantlimitations and exceptions. Words and expressions defined in ‘‘Conditions of the Bonds’’ and ‘‘Summaryof Provisions relating to the Bonds in Global Form’’ shall have the same meanings in this summary. Fora more complete description of the terms of the Bonds, see ‘‘Conditions of the Bonds’’.
Issuer Proven Honour Capital Limited
Guarantor Huawei Investment & Holding Co., Ltd.
Principal amount ofthe Bonds
US$1,000,000,000 aggregate principal amount of 4.125 per cent.guaranteed bonds due 2025.
Issue Price 99.006 per cent. of the principal amount.
Form and Denomination The Bonds will be issued in registered form in denominations ofUS$200,000 and integral multiples of US$1,000 in excess thereof.
Interest The Bonds will bear interest at a rate of 4.125 per cent. per annum.
Interest Payment Dates The Bonds will bear interest on their outstanding principal amount fromand including 19 May 2015, payable semi-annually in arrear in equalinstalments on 19 May and 19 November in each year, commencing on 19November 2015.
Issue Date 19 May 2015.
Maturity Date 19 May 2025.
Status of the Bonds The Bonds are direct, unconditional, unsubordinated and (subject to theprovisions of Condition 5 of the Conditions of the Bonds) unsecuredobligations of the Issuer and (subject as stated above) rank and will rankpari passu, without any preference among themselves, with all otheroutstanding unsecured and unsubordinated obligations of the Issuer,present and future, but, in the event of insolvency, only to the extentpermitted by applicable laws relating to creditors’ rights.
The Guarantee The Guarantor will in the trust deed to be dated 19 May 2015 to beentered into between the Issuer, the Guarantor and the Trustee (the‘‘Trust Deed’’) unconditionally and irrevocably guarantee the payment ofthe principal, premium and interest in respect of the Bonds and all othermoneys expressed to be payable by the Issuer under the Bonds and theTrust Deed. The Guarantee const i tutes direct , uncondit ional ,unsubordinated and (subject to the provisions of Condition 5 of theConditions of the Bonds) unsecured obligations of the Guarantor and(subject as stated above) rank and will rank pari passu with all otheroutstanding unsecured and unsubordinated obligations of the Guarantor,present and future, but, in the event of insolvency, only to the extentpermitted by applicable laws relating to creditors’ rights.
See ‘‘Conditions of the Bonds – Guarantee’’.
8
Negative Pledge The Bonds will contain certain negative pledge provisions as furtherdescribed in ‘‘Conditions of the Bonds – Covenants – Negative Pledge’’.
Events of Default Upon the occurrence of certain events described under ‘‘Conditions of theBonds – Events of Default’’, the Trustee at its discretion may, and if sorequested in writing by holders of at least one-quarter in principal amountof the Bonds then outstanding or if so directed by an ExtraordinaryResolution of the Bondholders shall (subject in each case to the Trusteehaving been indemnified and/or secured and/or pre-funded to itssatisfaction) give notice to the Issuer and the Guarantor that the Bondsare, and they shall accordingly forthwith become, immediately due andrepayable at their principal amount, together with accrued interest.
Taxation All payments in respect of the Bonds by or on behalf of the Issuer or theGuarantor shall be made free and clear of, and without withholding ordeduction for, or on account of, any present or future taxes, duties,assessments or governmental charges of whatever nature (‘‘Taxes’’)imposed or levied by or on behalf of the British Virgin Islands or thePRC or any political subdivision or any authority therein or thereofhaving power to tax, unless the withholding or deduction of such Taxes isrequired by law. In that event, the Issuer or (as the case may be) theGuarantor shall pay such additional amounts as may be necessary in orderthat the net amounts received by the Bondholders after the withholding ordeduction shall equal the respective amounts which would have beenreceivable in respect of the Bonds in the absence of the withholding ordeduction, subject to certain exceptions. As at the date of this OfferingCircular, payments of premium (if any) and interest on the Bonds by theGuarantor under the Guarantee are subject to a withholding tax at a rateup to 10 per cent. in the PRC, in respect of which the Guarantor will payadditional amounts so that after deducting or withholding such taxes,Bondholders will receive the amounts of premium (if any) and interestwhich would otherwise have been receivable in the absence of suchdeduction or withholding. The Guarantor will account directly to the PRCauthorities with respect to such taxes.
See ‘‘Conditions of the Bonds – Taxation’’.
Redemption for TaxationReasons
The Bonds may be redeemed at the option of the Issuer in whole, but notsome only, at their principal amount and premium (if any) together withaccrued interest, in the event that the Issuer or the Guarantor would berequired to pay additional amounts as provided or referred to in Condition8.2 of the Conditions of the Bonds in respect of the Bonds as a result ofany change in, or amendment to, the laws or regulations of the BritishVirgin Islands or the PRC or any political subdivision or any authoritytherein or thereof having power to tax, or any change in, or amendmentto, the application or official interpretation thereof, which change oramendment becomes effective on or after 12 May 2015. For the avoidanceof doubt, the additional amounts provided or referred to in Condition 9 ofthe Conditions of the Bonds which are to be paid as a result ofwithholding or deduction in respect of PRC enterprise income tax at a rateof up to 10 per cent. in respect of payments of premium (if any) andinterest on the Bonds by the Guarantor under the Guarantee shall notconstitute additional amounts for the purposes of Condition 8.2 of theConditions of the Bonds.
9
See ‘‘Conditions of the Bonds – Redemption and Purchase – Redemptionfor Taxation Reasons’’.
Redemption uponRelevant Event
Following the occurrence of a Relevant Event, the holder of each Bondwill have the right, at such holder’s option, to require the Issuer to redeemall, or some only, of its Bonds on the Put Settlement Date at (i) 101 percent. of their principal amount (in the case of a redemption for a Changeof Control) or (ii) 100 per cent. of their principal amount (in the case of aredemption for a No Registration Event), together in each case withaccrued interest to the Put Settlement Date. See ‘‘Conditions of the Bonds– Redemption and Purchase – Redemption upon Relevant Event’’.
Redemption at the optionof the Issuer
The Bonds may be redeemed at the option of the Issuer in whole or inpart at any time at a price equal to their Make Whole Amount togetherwith interest accrued but unpaid to the date fixed for redemption, on theIssuer giving not less than 30 nor more than 60 days’ notice to theBondholders. See ‘‘Conditions of the Bonds – Redemption and Purchase –
Redemption at the option of the Issuer’’.
Further Issues The Issuer is at liberty from time to time without the consent of theBondholders to create and issue further notes or bonds (whether in beareror registered form) either (a) ranking pari passu in all respects (or in allrespects save for the first payment of interest thereon) and so that thesame shall be consolidated and form a single series with the outstandingbonds or securities of any series (including the Bonds) constituted by theTrust Deed or any supplemental deed or (b) upon such terms as toranking, interest, conversion, redemption and otherwise as the Issuer maydetermine at the time of the issue. Any further bonds or securities whichare to form a single series with the outstanding bonds or securities of anyseries (including the Bonds) constituted by the Trust Deed or anysupplemental deed shall, and any other further bonds or securities may(with the consent of the Trustee), be constituted by a deed supplementalto the Trust Deed. The Trust Deed contains provisions for convening asingle meeting of the Bondholders and the holders of bonds or securitiesof other series in certain circumstances where the Trustee so decides. See‘‘Conditions of the Bonds – Further Issues’’.
Clearing Systems The Bonds will be represented by the beneficial interests in a GlobalCertificate in registered form which will be registered in the name of anominee of, and shall be deposited on or about the Issue Date with, acommon depositary for Euroclear and Clearstream, Luxembourg.Beneficial interests in the Global Certificate will be shown on andtransfers thereof will be effected only through records maintained byEuroclear and Clearstream, Luxembourg. Except as described in theGlobal Certificate, individual certificates for Bonds will not be issued inexchange for interests in the Global Certificate.
Clearance and Settlement The Bonds have been accepted for clearance by Euroclear andClearstream, Luxembourg under the following codes:
ISIN: XS1233275194Common Code: 123327519
Governing Law English law.
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Trustee DB Trustees (Hong Kong) Limited
Registrar Deutsche Bank Luxembourg S.A.
Principal Paying Agentand Transfer Agent
Deutsche Bank AG, Hong Kong Branch
Rating The Bonds have not been and will not be rated.
Listing Application will be made to the Hong Kong Stock Exchange for thelisting of, and permission to deal in, the Bonds on the Hong Kong StockExchange by way of debt issues to professional investors (as defined inthe Securities and Futures Ordinance (Cap. 571) of Hong Kong) only andsuch permission is expected to become effective on or about 20 May2015.
Use of Proceeds The net proceeds of the issue of the Bonds will be used for generalcorporate purposes. See ‘‘Use of Proceeds’’.
Selling Restrictions The Bonds will not be registered under the Securities Act and are beingoffered only outside the United States in reliance on Regulation S of theSecurities Act. There are restrictions on the offer and sale of the Bonds incertain jurisdictions including the United States, the United Kingdom,Singapore, Hong Kong, the PRC and the British Virgin Islands, and topersons connected therewith. See ‘‘Subscription and Sale’’.
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SELECTED FINANCIAL INFORMATION
The following tables set forth the selected financial information of Huawei as at and for the years ended31 December 2013 and 2014. The selected financial information as at and for the years ended 31December 2013 and 2014 set forth below has been derived from Huawei’s 2014 Financial Statements.The selected financial information should be read in conjunction with, and is qualified in its entirety byreference to, Huawei’s relevant consolidated financial statements, including the notes thereto, includedelsewhere in this Offering Circular. Huawei’s consolidated financial statements are prepared andpresented in accordance with IFRS.
Certain comparative amounts with respect to the year ended 31 December 2013 included in Huawei’s2014 Financial Statements have been restated. In 2014, the management of Huawei had determined thatcertain operating support activities in Huawei’s selling organisation, previously recorded as sellingexpenses, would be more appropriately presented as administrative expenses, and that the productmanagement activities for product divisions, previously presented as selling expenses, should bechanged to research and development expenses to more accurately reflect their function. Themanagement of Huawei also further determined that certain cash received from customers would bemore appropriately presented as advances received within other payables, rather than being offsetagainst the receivables due from the same customers. Huawei’s senior management also adjusted thesegment reporting solution based on the development of the business. The comparatives as at and forthe year ended 31 December 2013 have been restated to comply with the presentation in 2014. Thesechanges in presentation have had no impact on reported operating profit or net assets. For moredetails, please see note 40 to Huawei’s 2014 Financial Statements included elsewhere in this OfferingCircular.
Consolidated Income Statement Data
As at 31 December
2013(1) 2014 2014
(restated)(RMB’000) (RMB’000) (US$’000)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,025,010 288,197,429 46,514,966Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141,005,320) (160,746,505) (25,944,431)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,019,690 127,450,924 20,570,535Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,064,542 1,724,398 278,317Research and development expenses. . . . . . . . . . . . . . . . . . . . . . . . . . (31,562,698) (40,844,786) (6,592,334)Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,323,873) (28,750,390) (4,640,303)Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,727,766) (18,717,593) (3,021,013)Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,341,457) (6,656,979) (1,074,434)
Operating profit before financing costs . . . . . . . . . . . . . . . . . . . . . . 29,128,438 34,205,574 5,520,768Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,946,010 3,242,624 523,358Finance expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,888,762) (4,697,974) (758,251)
Net finance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,942,752) (1,455,350) (234,893)Share of associates’ results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,073 332,172 53,612Share of joint ventures’ results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,990) (28,997) (4,680)
Profit before taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,161,769 33,053,399 5,334,807Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,158,752) (5,186,985) (837,177)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,003,017 27,866,414 4,497,630
Attributable to:Equity holders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,919,275 27,850,733 4,495,099Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,742 15,681 2,531
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,003,017 27,866,414 4,497,630
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As at 31 December
2013(1) 2014 2014
(restated)(RMB’000) (RMB’000) (US$’000)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,003,017 27,866,414 4,496,630
Other comprehensive income for the year(after tax and reclassification adjustments)
Items that will not be reclassified subsequently to profit or loss:Remeasurement of defined benefit obligations . . . . . . . . . . . . . . . . . (618,227) (166,063) (26,803)
Items that will or may be reclassified subsequently to profit or loss:Net change in the fair value of available-for-sale securities . . . . . . . . 164,957 (200,040) (32,286)Exchange differences on translation of financial statements of
foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,573 173,658 28,028
394,530 (26,382) (4,258)Other comprehensive income for the year . . . . . . . . . . . . . . . . . . . . . . (223,697) (192,445) (31,061)
Total comprehensive income for the year . . . . . . . . . . . . . . . . . . . . . 20,779,320 27,673,969 4,466,569
Attributable to:Equity holders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,693,494 27,663,609 4,464,897
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,826 10,360 1,672
Total comprehensive income for the year . . . . . . . . . . . . . . . . . . . . . 20,779,320 27,673,969 4,466,569
Consolidated Statement of Financial Position
As at 31 December
2013(1) 2014 2014
(restated)(RMB’000) (RMB’000) (US$’000)
AssetsGoodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,342,717 307,325 49,602Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,410,305 2,290,415 369,672Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,209,029 27,247,616 4,397,756Long-term leasehold prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,761,112 3,349,232 540,565Interest in associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,736 548,401 88,512Interest in joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,869 107,249 17,310Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583,874 540,090 87,170Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,576,567 14,916,223 2,407,473Trade receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,603 445,969 71,979Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987,821 2,915,673 470,589
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,687,633 52,668,193 8,500,628
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,928,931 46,575,920 7,517,338Trade and bills receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,005,307 79,579,628 12,844,125Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,525,125 24,912,638 4,020,891Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,544,966 27,988,664 4,517,361Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,398,640 78,047,655 12,596,865Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – –
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,402,969 257,104,505 41,496,580
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,090,602 309,772,698 49,997,208
EquityPaid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,088,632 12,813,950 2,068,167Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,550,545 41,930,527 6,767,573Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,676,022 18,720,029 3,021,406Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,891,507 26,475,000 4,273,056
Equity attributable to equity holders of the Company. . . . . . . . . . . . 86,206,706 99,939,506 16,130,202Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,410 45,571 7,355
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,266,116 99,985,077 16,137,557
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As at 31 December
2013(1) 2014 2014
(restated)(RMB’000) (RMB’000) (US$’000)
LiabilitiesInterest-bearing loans and borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 19,989,460 17,576,885 2,836,903Long-term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,608,257 9,731,333 1,570,634Deferred government grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,746,397 2,656,019 428,681Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475,744 320,488 51,727Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781,688 964,028 155,594
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,601,546 31,248,753 5,043,539
Interest-bearing loans and borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 3,043,280 10,529,847 1,699,514Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,034,410 5,947,493 959,923Trade and bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,980,480 45,898,550 7,408,010Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,447,144 108,818,033 17,563,193Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,717,626 7,344,945 1,185,472
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,222,940 178,538,868 28,816,112
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,824,486 209,787,621 33,859,651
Total equity and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,090,602 309,772,698 49,997,208
Note:
(1) Huawei’s consolidated financial statements as at and for the year ended 31 December 2012, which are included elsewhere inthis Offering Circular, have not been restated to reflect the abovementioned reclassifications, restatements or amendments.Therefore the consolidated financial information as at and for the year ended 31 December 2012 are not directly comparableto Huawei’s consolidated financial information as at and for the years ended 31 December 2013 and 2014 contained inHuawei’s 2014 Financial Statements contained herein. For more details, please see the section entitled ‘‘Risk Factors – Risksrelating to Huawei’s Business and Industry – Huawei’s financial information as at and for the year ended 31 December2012 has not been restated and may not be comparable to Huawei’s financial information as at and for the years ended 31December 2013 and 2014 contained in Huawei’s 2014 Financial Statements.’’ Potential investors must exercise cautionwhen using such financial information as at and for the year ended 31 December 2012 to evaluate Huawei’s financialcondition and results of operations.
Other Financial and Operating Data
2013 2014 2014
(restated)(RMB inmillions)
(RMB inmillions)
(US$ inmillions)
EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,380 42,611 6,877Total debt/EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7x 0.7x 0.7xEBITDA/Interest expenses(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.9x 20.2x 20.2xFree cash flow/Total debt(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.3% 124.8% 124.8%Total debt/Total capitalisation(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1% 21.9% 21.9%Cash and cash equivalent/Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . 318.7% 277.7% 277.7%EBITDA margin(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.8% 14.8% 14.8%
Notes:
(1) EBITDA equals to the sum of operating profit before financing costs, depreciation and amortisation and impairment losses.
2013 2014 2014
(restated
EBITDA(RMB inmillions)
(RMB inmillions)
(US$ inmillions)
Operating profit before financing costs . . . . . . . . . . . . . . . . . . . 29,128 34,205 5,521Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . 4,281 4,574 738Impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,971 3,832 618
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,380 42,611 6,877
(2) Total debt equals to the sum of interest bearing loans and borrowings (non current portion) and interest bearing loans andborrowings (current portion).
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(3) Interest expenses equals to the sum of interest expense and bank charges.
(4) Free cash flow equals EBITDA minus acquisition of property plant and equipment, acquisition of intangible assets and longterm leasehold prepayments, acquisition of subsidiaries and investment in an associate.
(5) Total capitalisation equals to the sum of total debt and total equity.
(6) EBITDA margin equals EBITDA divided by revenue.
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RISK FACTORS
Prior to making any investment decision, investors should consider carefully all of the information inthis Offering Circular, including the risks and uncertainties described below. The business, financialcondition or results of operations of Huawei could be materially adversely affected by any of theserisks. The Issuer and the Guarantor believe that the following factors may affect the ability of the Issuerand the Guarantor to fulfil their obligations under the Bonds and the Guarantee, respectively. All ofthese factors are contingencies which may or may not occur and neither the Issuer nor the Guarantor isin a position to express a view on the likelihood of any such contingency occurring. Factors which theIssuer or the Guarantor believes may be material for the purpose of assessing the market risksassociated with the Bonds and the Guarantee are also described below.
The Issuer and the Guarantor believe that the factors described below represent the principal risksinherent in investing in the Bonds, but the inability of the Issuer or the Guarantor to pay principal,interest (if any), premium or other amounts or fulfil other obligations on or in connection with theBonds may occur for other reasons and neither the Issuer nor the Guarantor represents that thestatements below regarding the risks of holding the Bonds are exhaustive.
Risks relating to Huawei’s Business and Industry
Demand for Huawei’s products and services is sensitive to global economic conditions.
Challenging economic conditions worldwide have from time to time contributed, and may continue tocontribute, to slowdown in the communications and networking industries at large. Adverse economicconditions could cause telecommunications carriers, which Huawei’s carrier segment is dependent on, topostpone investments or initiate other cost-cutting initiatives to improve their financial position. Thiscould result in significantly reduced expenditures for network infrastructure and services, in which caseHuawei’s operating results would suffer.
Huawei’s fast-growing enterprise and consumer market segments are also sensitive to worldwideeconomic conditions and are dependent significantly on demand from retail and commercial customersas well as the performance of distributors and retailers that sell Huawei’s products. Macroeconomicfactors that influence consumer confidence and spending behaviour include the level of inflation andunemployment, fluctuations in energy prices and conditions in the real estate markets. An actual oranticipated deterioration of economic conditions in any of Huawei’s major markets may depressconsumer confidence and spending, resulting in a decline in consumption that would have a negativeimpact on demand for Huawei’s products and the prices at which they can be sold.
The potential adverse effects of an economic downturn on Huawei include:
• reduced demand for its products and services, resulting in increased price competition or deferralsof purchases, with costs reduction not being sufficient to compensate its reduced revenue fully;
• risks of excess and obsolete inventories and excess manufacturing capacity;
• risks of financial difficulties or failure among Huawei’s suppliers, commercial customers and otherbusiness partners of Huawei. These entities may also experience deterioration in their businessesduring global economic downturns due to reduced end-user demand, cash flow shortages anddifficulty in obtaining financing. This could have a number of adverse effects on Huawei’sbusiness, including the insolvency or financial instability of Huawei’s suppliers or commercialcustomers that could impact their ability to fulfil their contractual obligations to provide Huaweiwith components or to purchase Huawei’s products;
• risks of a significant deterioration in the global financial markets making it more difficult forcustomers to obtain credit to finance purchases of Huawei’s products, which could result in furtherpressure on Huawei’s profit margins;
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• increased demand for customer finance, difficulties in collection of accounts receivable andincreased risk of counterparty failure; and
• increased difficulties in forecasting sales and financial results as well as increased volatility inHuawei’s reported results.
The global macroeconomic environment and recovery from the downturn has been challenging andunstable. Volatility in the global credit markets (such as the Eurozone debt crisis), the impact ofuncertainty regarding the United States federal budget, the volatility in the geopolitical environment inmany parts of the world and other disruptions may continue to put pressure on global economicconditions. If economic conditions in Huawei’s key markets remain uncertain or deteriorate further,Huawei may experience a material impact on its business, operating results and financial condition.
Huawei operates in a competitive industry and its failure to successfully compete would adverselyaffect its market position and business.
The markets for Huawei’s products and services are highly competitive and Huawei faces intense globalcompetition. Huawei competes in the networking, communications equipment and mobilecommunications markets, providing products and services for transporting data, voice, and video trafficacross intranets, extranets, and the Internet. These markets are characterised by rapid changes,converging technologies, erosion of average selling prices, frequent product enhancements and relativelyshort product lifecycles. These factors represent both an opportunity and a competitive threat to Huawei.Due to the fact that Huawei operates through several business segments in different industries withmany product and service categories, it faces a broad range of existing and new competitors rangingfrom large multinational companies to highly specialised entities that focus on a limited number ofbusiness lines. Also, the identity and composition of competitors may change as Huawei enters into newmarkets or businesses. As Huawei continues to expand globally, it may experience new competition indifferent geographic regions.
The principal competitive factors in the markets in which Huawei presently competes and may competein the future include:
• the ability to lead through critical technological cycles with new products, including products withtechnical and price-performance advantages;
• technology leadership;
• market share and business scale;
• long-term relationships with, and deep knowledge of, its customers;
• participation and influence in setting industry standards;
• end-to-end solution capabilities that meet telecommunications carriers’ comprehensive technical,financial and other requirements;
• breadth and depth of products and services;
• effective end-to-end cost management, including research and development, production, servicedelivery, procurement, functional and operational support; and
• brand name.
Huawei faces competition from a growing number of participants in different user segments, price pointsand geographical markets. Some of these competitors may have greater resources in certain businesssegments or geographic markets than Huawei does. This may make it more difficult for Huawei to
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compete successfully with differentiated offerings across the whole market against more specialisedcompetitors. It may also limit Huawei’s ability to leverage effectively its scale and other traditionalstrengths, such as its brand, research and development and intellectual property, manufacturing andlogistics, distribution, and strategic sourcing, to achieve significant advantages compared to itscompetitors. Huawei’s competitors may implement new technologies before it does, offer moreattractively priced or enhanced products, services or solutions, or they may offer other incentives thatHuawei does not provide. Rapid technological change also results in shorter lifecycles for products,increasing risks in all product investments. Constant price erosion is a symptom of this rapidtechnological change and Huawei must counteract this by introducing new products to the market and bycontinuously enhancing functionality while reducing the cost of new and existing products.
Huawei’s success depends on its ability to develop new products in a timely and cost-effective mannerthat addresses rapidly evolving customer preferences and advancements in technology.
The markets for Huawei’s products and services, especially consumer electronics products and mobilecommunications devices, are characterised by rapidly changing technology, evolving industry standards,new products and solutions, the introduction of evolving methods of building and operating networksand continuous improvements in performance characteristics and product features, which result in shortproduct cycles, frequent introduction of new products and price erosion of existing products. Advancesin technology typically lead to rapid declines in sales volumes for products made with oldertechnologies and lead to certain products becoming less competitive in the marketplace, or evenobsolete. A short product cycle could also intensify market competition and reduce customer retention.There can be no assurance that Huawei will not incur substantial charges in the future as a result ofproduct obsolescence. Accordingly, Huawei’s success depends greatly on its ability to anticipate andrespond to emerging customer preferences and demands by ensuring continuing and timely developmentof new products, as well as enhancements to existing products and services. In particular, sales of newconsumer products, including smartphone and tablet devices, have accounted for an increasing portion ofHuawei’s total revenue and operating income in recent years. Huawei must continue to bring to marketmobile phones that feature differentiated hardware, localised services and applications as well ascompetitive pricing in order to continue to attract new and existing users.
Huawei may not be able to ensure its competitiveness in the market as a result of a variety of factors,including failure to anticipate consumer trends and needs; insufficient execution in Huawei’s researchand product development processes; or an inability to secure necessary components or software assetsfrom suppliers in sufficient quantities on a timely basis. Failure of or delays in understanding oranticipating market trends or delays in innovation, product development and execution may also result ina suboptimal portfolio of products and services, gaps in certain price points or an uncompetitiveoffering. This in turn may lead to a negative effect on Huawei’s market share, net sales and profitability,but may also erode its brand by disappointing customers in the carrier, enterprise and consumer marketsegments. If Huawei fails in launching new products and services, has insufficient breadth of availableapplications or content, provides inadequate or unsuccessful updates to such new products and servicesor there are other defects or quality issues with its telecommunications devices, this may cause customerretention and engagement with Huawei’s products to deteriorate.
In addition, Huawei has made, and will continue to make, significant investments in research anddevelopment of new technologies, products and services. The research and development of newtechnologies and products is a complex process that requires high levels of innovation and expendituresas well as the accurate anticipation of market trends and customer preferences. Huawei’s total researchand development expenses were RMB31,563 million in 2013 and RMB40,845 million in 2014. Therecan be no assurance that Huawei will succeed in focusing its research and development efforts ontechnologies that eventually become widely accepted, or on products that are timely released orcommercially viable. In addition, there can be no assurance that Huawei will be able to keep pace withtechnological changes in the marketplace and continue to develop new technologies and products in atimely and cost-effective manner.
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Huawei’s carrier business depends on a limited number of telecommunications carriers.
Huawei derives most of its revenue from long-term framework agreements with a limited number oftelecommunications carriers. A loss of or a reduced role with any key customer could have a significantadverse impact on revenue, profit and market share for an extended period.
The business operations of these telecommunications carriers and their capital expenditure used topurchase these products and related services have a direct impact on Huawei’s sales revenue. The levelof activities in the telecommunications industry fluctuates and such fluctuation has a distinct feature ofregionality. Huawei intends to continue to focus on the international market to mitigate the negativeimpact on the domestic telecommunications industry caused by any industry fluctuation. In addition,telecommunications carriers may adjust their purchase focus on products and solutions according totechnology evolution and market demands due to the rapidly changing technology, evolving industrystandards, changing regulatory requirements in different jurisdictions and new product introductions,which may also influence Huawei’s sales and in turn have an adverse material effect on Huawei’sbusiness, financial condition and results of operations.
In recent years, telecommunications carriers have undergone significant consolidation, resulting in anincreased number of carriers with activities in several countries. This trend is expected to continue, andintra-country consolidation is also likely to accelerate as a result of competitive pressure. A market withfewer and larger operators will increase Huawei’s reliance on key customers and may negatively impactHuawei’s bargaining position and profit margins. Moreover, if the combined companies operate in thesame geographic market, networks may be shared and less network equipment and associated serviceswill be required. Customer consolidation may also result in a delay in network investments pendingnegotiations of, for example, merger and acquisition agreements, securing necessary approvals, orintegration of their businesses. Recently, telecommunications carriers have started to share parts of theirnetwork infrastructure through cooperation agreements rather than legal consolidations, which mayadversely affect demand for network equipment.
In addition, long-term framework agreements that Huawei entered into with telecommunications carriersare typically awarded on a competitive bidding basis. In some cases, such agreements also includecommitments to future price reductions. In order to maintain Huawei’s gross margin in the face of suchprice reductions, Huawei continuously strives to reduce the costs of its products through designimprovements, negotiation of better purchase prices, allocation of more production to low-cost countriesand increasing production efficiency. However, there can be no assurance that the action to reduce costswill be sufficient to maintain the gross margin of Huawei under its long-term framework agreements.
The telecommunications industry is subject to extensive government regulation which is still evolving.
Telecommunications is an industry subject to specific regulation in most jurisdictions. Regulatorychanges affect both Huawei’s customers’ and its own operations. In certain countries where Huaweioperates, the authorities have broad discretion and authority to regulate all aspects of thetelecommunications and information technology industries, including arranging the setting of networkequipment specifications and standards, approving equipment for access to telecommunicationsnetworks, supervising the tender process for telecommunications infrastructure projects and formulatingpolicies and regulations related to the telecommunications industry. In addition, the telecommunicationsregulatory framework in certain countries is still in the process of being developed. Changes inregulatory requirements, tariffs and other trade barriers, price or exchange controls or othergovernmental policies in the countries where Huawei operates could also limit its operations, affectHuawei’s opportunities to work with specific telecommunications carriers and make the repatriation ofprofits difficult.
Huawei may also be exposed to difficulties and costs relating to compliance with the differentcommercial and legal requirements of the overseas markets, such as licensing and certificationrequirements, import regulatory procedures, taxes and other restrictions and expenses. Due to differentrequirements under different local regulatory systems, Huawei may encounter potential service
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interruptions of its services due to national security laws or policies in the international markets inwhich Huawei operates. Although Huawei seeks to comply with all such regulations in the jurisdictionswhere it operates, even unintentional violations could have a material adverse effect on its business,operational results and brand.
Huawei is subject to claims of infringement of intellectual property rights by third parties, which ifdetermined adversely to Huawei, could cause Huawei to lose significant rights, pay significantdamages or suspend the sale of certain products.
Huawei’s wide range of products and services includes increasingly complex technologies, some ofwhich have been developed by Huawei or licensed to Huawei by third parties. Huawei is dependent onsuch technologies. As the amount and complexity of such proprietary technologies and the number ofparties claiming intellectual property rights continue to increase, technology-driven companies, includingHuawei and many of its competitors, are frequently involved in litigation based on allegations of patentinfringement or other violations of intellectual property rights. In addition, patent holding entities mayseek to monetise patents they have purchased or otherwise obtained. As a result, Huawei faces the riskof litigation and regulatory proceedings relating to infringement of intellectual property rights in variouscountries in which it operates. Given the existence of a large number of patents and intellectual propertyrights in telecommunication, networking, semi-conductor and consumer electronic fields, theconfidentiality of some pending patents and the rapid issuance of new patents, it is not economicallypracticable or even possible for Huawei to determine in advance whether a product or any of itscomponents infringes or will infringe the patent rights of others.
In addition, many key aspects of telecommunications and data network technology are governed byindustry-wide standards usable by all market participants. Since all technology standards, includingthose Huawei uses and relies on, contain certain intellectual property rights, Huawei cannot fully avoidthe risks of a claim for infringement of such rights due to its reliance on such standards. Not allintellectual property owners agree on the principle that such intellectual property rights declared orfound to be essential to a given standard carry with them an obligation to be licensed on fair, reasonableand non-discriminatory terms and thus costly and time-consuming litigation over such issues hasoccurred and may continue to appear in the future. Huawei is currently subject to various patentlitigations that have not been fully resolved and additional claims may arise in the future. See‘‘Description of the Group’’. Regardless of the scope or validity of disputed patents or the merits of anyinfringement claims by potential or actual litigants, Huawei may have to engage in protracted litigation.The defence and prosecution of intellectual property suits, patent proceedings and related legal andadministrative proceedings can be both costly and time-consuming and may significantly divert theefforts and resources of Huawei’s technical and management personnel. An adverse determination in anysuch litigation or proceedings could subject Huawei to pay substantial damages to third parties, requireHuawei to seek licences from third parties and pay ongoing royalties, or redesign certain products, oreven subject Huawei to injunctions prohibiting the manufacture and sale of its products or the use oftechnologies in certain jurisdictions. Protracted litigation could also discourage Huawei’s industrialcustomers from purchasing its component products until resolution of such litigation. The occurrence ofany of the foregoing could have a material adverse effect on Huawei’s reputation, business, results ofoperations and financial condition.
The occurrence or perception of a breach of Huawei’s security measures resulting in inappropriatedisclosure or leakage of personally identifiable and other confidential information and data handledby Huawei or its products could harm Huawei’s reputation and its business.
As part of Huawei’s business, personally identifiable and other confidential information and data fromend-users may be collected, stored and transmitted by or through Huawei’s products and services, suchas its smartphones, software applications and online streaming services. Operating systems, software andapplications that Huawei procures from third parties may contain defects in design or manufacture,including ‘‘bugs’’ and other problems that could unexpectedly interfere with the operation of the systemor present previously unidentified security risks. Although Huawei endeavours to develop products that
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adhere to strict security standards and devotes significant resources to network security, data encryptionand other security measures, Huawei and its products may be subject to hacking, viruses, worms andother malicious software, unauthorised modifications or illegal activities that cause potential securityrisks. In addition, governmental authorities may use Huawei’s products and services to access thepersonal data of individuals without Huawei’s involvement or knowledge. In the event that its securitymeasures are breached, Huawei may be unable to protect sensitive data, resulting in an unauthorisedrelease or leakage of confidential information, potentially exposing Huawei to litigation or regulatoryaction that could result in significant liability or other sanctions. Even if Huawei is not held liable, asecurity breach or inappropriate disclosure of confidential information could harm Huawei’s reputationand negatively impact the sale of Huawei’s products, which could have an adverse effect on Huawei’sbusiness, results of operations and financial condition.
The costs to Huawei to eliminate or address the foregoing security risks are likely to increase as itexpands its enterprise and consumer businesses. Huawei’s remedial efforts may not be successful andcould result in interruptions, delays, or cessation of service, and loss of existing or potential customersthat may impede its sales, manufacturing, distribution, or other critical functions.
Cyber security and privacy-related laws are complex, variable and ever-changing. Such laws may beimplemented in different ways or there might be different interpretations of the same laws or relatedcodes, standards and international controls, which add a further layer of complexity and risk to asupplier and a business. Complying with these various laws could cause Huawei to incur substantialcosts or require Huawei to change its business practices and could have a material and adverse effect onHuawei’s business, future results of operations and prospects.
Huawei’s competitive position may be undermined if it does not adequately protect its intellectualproperty rights, and litigation to protect its intellectual property rights may be costly and may not beresolved in its favour.
Huawei depends heavily on its intellectual property and proprietary technologies to maintain itscompetitive position. Huawei owns significant intellectual property, including a large number of patents,trade marks, copyrights and trade secrets and its success depends, to a significant extent, on its ability toobtain and enforce intellectual property rights worldwide. Huawei seeks to protect its intellectualproperty and proprietary rights primarily through intellectual property laws, relying on a combination ofpatents, trade secrets, trade marks and copyrights and similar protections, as well as through contractualrestrictions in its licensing arrangements. With respect to proprietary know-how that is not patentable,Huawei relies on trade secret protections and confidentiality agreements to safeguard its interests.Although Huawei has been granted numerous patents, and has other patent applications pendingcurrently, there can be no assurance that any rights will be granted or any future patents or otherintellectual property rights will be enforceable or sufficiently broad to protect its technology and providea competitive advantage for Huawei.
Steps taken by Huawei to protect its intellectual property and proprietary information may not beadequate to prevent misappropriation of its technology, as the existence of laws or contracts prohibitingsuch actions may not always serve as sufficient deterrents, and policing unauthorised use of Huawei’sintellectual property may be expensive and time-consuming. Any patents or other intellectual propertyrights that are granted to Huawei may be challenged, invalidated or circumvented, and may becomesubject to dispute which could be resolved against Huawei. If any of Huawei’s key patents areinvalidated, or if the scope of the claims in any of these patents is limited by a court decision, it couldbe prevented from using such patent as a basis for product differentiation or from licensing theinvalidated or limited portion of its intellectual property rights, or it could lose part of the leverage ithas in terms of its own intellectual property rights portfolio. Reverse engineering, unauthorised copyingor other misappropriation of Huawei’s intellectual property and proprietary technologies could enablethird parties to benefit from Huawei’s technologies without paying Huawei for doing so, and Huaweimay be unable to determine the extent of any unauthorised use of its intellectual property.
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In order to protect its intellectual property rights and maintain its competitive advantage, Huawei hasfiled in the past and may continue to initiate legal proceedings against parties that it believes infringe itsintellectual property. Such litigation may divert management’s attention as well as expend Huawei’sresources away from the operation of its business. Huawei may also have to bring legal action in foreignjurisdictions and effective patent, copyright and trade secret protection may be unavailable or limited insome foreign countries in which Huawei conducts business. In addition, depending on the jurisdiction,statutory differences in patentable subject matter may limit the protection Huawei can obtain under apatent. Although Huawei is not dependent on any individual patent or group of patents for particularsegments of its business, if it is unable to adequately protect its intellectual property rights, Huawei’scompetitive position may be undermined, which may have a material adverse effect on Huawei’sbusiness, results of operations and financial condition.
Huawei’s results of operations depend in part on the quality, performance and availability of softwareprovided by third-party business partners.
Huawei believes that decisions made by customers to purchase their electronics products, in particularsmartphone and tablet devices, depend in part on the quality, performance and availability of third-partysoftware applications and services that run on the products. For example, a significant number ofHuawei’s latest smartphone and tablet devices operate on Google’s Android operating system. Inaddition, Huawei’s other products that may be sold in the future may also rely on, or operate inconjunction with, software developed by third parties. To the extent that the functionality andperformance of third-party software that run on Huawei’s products are not competitive with thealternative options offered in the market, consumers may choose not to purchase Huawei’s products,which would adversely affect Huawei’s business, results of operations and financial condition.
The availability of open-source software platforms, such as Google’s Android operating system, couldmake entry and expansion in certain markets, including the smartphone and tablet device markets, easierfor mobile communications and media device manufacturers. Since such software platforms would beavailable equally to other competitors, product differentiation could become more challenging forHuawei, which in turn could potentially lead to increased commoditisation of such products in themarket and increased downward pricing pressures. In addition, in the event that the software companieselect to restrict their open-source software platforms, Huawei may be required to pay software licencefees, spend additional capital on research and development activities or make acquisitions to address itssoftware needs.
Huawei relies on access to third-party technology or intellectual property which may not be availableto Huawei on commercially reasonable terms or at all.
Many of Huawei’s products, including mobile phones, tablets and network products, are designed toinclude, or manufactured using, technology licensed from third parties. Huawei has entered intotechnology licensing agreements with various third parties for the use of intellectual property rights,some of which are integral in manufacturing Huawei’s products, for which Huawei makes periodiclicence fee payments. Huawei also has cross-licence agreements with various other third parties thatprovide those parties with the right to use patents and technologies developed by it, as well as enableHuawei to use patents and other technologies developed by them.
There is no assurance that the necessary licences can be obtained or renewed on acceptable terms or atall. Failure to obtain or renew its technology licensing arrangements on commercially reasonable terms,or at all, could preclude Huawei from selling certain products or otherwise may have a material adverseimpact on its business, results of operations and financial condition.
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If Huawei fails to maintain and enhance its brand recognition, or if it incurs excessive expenses inthis effort, Huawei’s business, future results of operations and prospects could be materially andadversely affected.
It is critical for Huawei to maintain and develop its brands so as to effectively expand its user base,maintain and increase its business partnerships, and grow its revenue. Well-recognised brands such asthe Honor and Ascend series for smartphone models are critical to increasing the number andengagement of Huawei’s users and, in turn, enhancing its attractiveness to advertisers. Since Huaweioperates in a highly competitive market, maintaining and enhancing its brands directly affects its abilityto maintain its market position. Huawei’s main competitors also have established brands and arecontinuing to take steps to increase their brand recognition and Huawei must continue to maintain andenhance the recognition and value of its brands in this highly competitive market. In order to attract andretain users, Huawei may need to substantially increase its expenditures for creating and maintainingbrand loyalty. As a result, Huawei’s sales and marketing expenses may increase significantly, which mayimpact its profitability. In addition, the use of words or branding similar to Huawei’s brands by thirdparties in other industries could dilute the brand recognition for its brands. If Huawei is unable tomaintain and enhance its brand recognition, its business, future results of operations and prospects couldbe materially and adversely affected.
Problems with product quality and defects could result in a loss of customers as well as increasedwarranty and product liability claims which may adversely affect Huawei’s business.
Huawei’s products are becoming increasingly sophisticated and complex due to rapid advancements intechnologies and increasing demand from customers for additional functionalities, and defects in theirdesign, manufacture and associated hardware, software and content have occurred and may occur in thefuture. While Huawei employs strict quality assurance procedures at key manufacturing stages toidentify and resolve quality issues, the products may contain undetected defects or otherwise fail toperform as expected, especially when new products using the latest technologies are first introduced tothe market. These defects could cause Huawei to incur significant re-engineering costs, divert theattention of engineering personnel from product development efforts or lead to returns of Huawei’sproducts, which could adversely affect Huawei’s customer relations and business reputation. Due to thehigh production volumes of many of Huawei’s products, even a single defect in their design,manufacture or associated hardware, software and content may have a material adverse effect on itsbusiness. Furthermore, Huawei’s product portfolio is subject to continuous renewal which, particularlyduring periods of significant portfolio renewals, may increase the risk of quality issues related to itsproducts.
Defects and other quality issues may result from, among other things, failure in Huawei’s own productand service creation and delivery, as well as manufacturing processes; failure of its suppliers to complywith its supplier requirements or failure in products and services created jointly with collaborationpartners or other third parties where the development and manufacturing process is not fully in itscontrol. In case of issues affecting a product’s safety, regulatory compliance including but not limited to,privacy or security, Huawei may be subject to damages due to product liability, and defective products,components or service offerings may need to be replaced or recalled. With respect to Huawei’s services,quality issues may relate to the challenges in having the services fully operational at the time they aremade available to its customers and consumers and maintaining them on an ongoing basis.
Under Huawei’s general terms and conditions of sale and in accordance with industry practice, Huaweitypically provides a limited warranty on its products that is usually limited to repair or replacement ofdefective items or return of, or a credit with respect to, amounts paid for such items. Under limitedcircumstances, Huawei also provides more extensive limited warranty coverage. Huawei currently carrieslimited insurance coverage for product liability claims brought against it. Huawei generally makesprovisions for warranty to cover future costs of warranty claims by its customers, based on its historicalexperience, terms of warranty programmes and best estimates of amounts necessary to settle existing andfuture warranty claims. However, there can be no assurance that the amounts determined to be payable
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by Huawei for product warranty claims will not exceed Huawei’s estimated warranty provisions.Widespread product failure that results in liabilities in excess of its insurance coverage and provisionestimates could have a material adverse effect on Huawei’s reputation, results of operations and financialcondition.
Huawei depends on third-party suppliers for key raw materials, components and manufacturingequipment, and disruption in their supply or significant increase in their prices would negativelyaffect Huawei’s business.
Huawei’s business operations depend on its ability to obtain adequate supplies of suitable quality rawmaterials and components, as well as a substantial portion of its manufacturing equipment, on a timelybasis from external suppliers located in China and abroad. The raw materials and components Huaweiuses to manufacture its products include final products, printed circuit board assembly and opticcomponents, as well as servers and accessories.
Huawei manages its inventory of raw materials and components based on rolling forecasts of customerdemand and orders raw materials and components in advance of product announcements and shipmentsbased on such forecasts. Shortages of raw materials and components may result in a reduction orsuspension of production or an increase in the production costs. Accordingly, Huawei maintains closeand long-term relationships with its suppliers in order to ensure a stable supply of raw materials andcomponents. In order to reduce its dependence on any one supplier for key raw materials andcomponents, Huawei maintains a general policy of relying on multiple suppliers for the most essentialitems and is continuing to expand its supply sources in an effort to improve quality and minimise costs.However, from time to time, Huawei may experience disruption in the supply of raw materials orcomponents that may impair Huawei’s ability to manufacture its products. Although Huawei strives toavoid single-source supplier solutions, in some cases a particular component is available only from onesupplier or a limited number of suppliers. In addition, Huawei’s dependence on third-party suppliers hasincreased in recent years as a result of its strategic decision to outsource most of its manufacturingneeds. For example, most of the manufacture of printed circuit board assembly is outsourced toFlextronics and Foxconn. Suppliers may from time to time extend lead times, limit supplies, changetheir partner preferences, increase prices or be unable to increase supplies to meet increased demand dueto capacity constraints or other factors, which could adversely affect Huawei’s ability to deliver itsproducts on a timely basis. If Huawei fails to anticipate customer demand properly, an oversupply orundersupply of components and production capacity could occur. In many cases, some of Huawei’scompetitors utilise the same contract manufacturers. When there are capacity constraints, these couldlimit Huawei’s ability to supply its customers or increase its costs. Huawei also commits to certaincapacity levels or component quantities which, if unused, will result in charges for unused capacity orscrapping costs.
There could be significant disruption in the supply of raw materials, components or manufacturingequipment due to various reasons, including work stoppage, strike or other labour-related disruption atHuawei’s key suppliers or disruption in their production resulting from natural disasters. Failure of a keysupplier to supply raw materials, components or manufacturing equipment that meet Huawei’s quality,quantity and cost requirements in a timely manner, failure to maintain Huawei’s relationships with keysuppliers, or Huawei’s inability to obtain these materials from alternative sources on a timely basis or oncommercially reasonable terms could impair Huawei’s ability to manufacture its products or increase itsproduction costs, which could have a material adverse effect on Huawei’s business, results of operationsand financial condition.
Huawei’s Consumer Business depends on the performance of carriers, distributors and other resellers.
Huawei distributes its consumer products through network carriers, retailers and resellers, many ofwhom distribute products from competing manufacturers. Huawei also sells its products in many of itsmajor markets through its online and retail stores.
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Carriers providing cellular network services for Huawei’s mobile phones typically subsidise users’purchases of the device. There is no assurance that such subsidies will be continued at all or in the sameamounts upon renewal of Huawei agreements with these carriers or when Huawei enters into agreementswith new carriers.
Many distributors and resellers of Huawei’s consumer products have narrow operating margins and havebeen adversely affected by weak economic conditions in the past. Some distributors and resellers haveperceived the expansion of Huawei’s direct sales as conflicting with their business interests asdistributors and resellers of Huawei’s products. Such a perception could discourage them from investingresources in the distribution and sale of Huawei’s consumer products or lead them to limit or ceasedistribution of those products. Huawei has invested and will continue to invest in programmes toenhance reseller sales. These programmes could require a substantial investment while providing noassurance of return or incremental revenue. The financial condition of these resellers could weaken, orthese resellers could stop distributing Huawei’s products, or uncertainty regarding demand for Huawei’sproducts could cause resellers to reduce their ordering and marketing of Huawei’s consumer products.
Huawei is exposed to credit risk on its trade receivables and this risk increases during periods wheneconomic conditions worsen.
As at 31 December 2013 and 2014, Huawei’s trade receivables amounted to RMB72,352 million andRMB75,845 million, respectively. A substantial portion of Huawei’s outstanding trade receivables arenot covered by collateral or credit insurance. Huawei’s exposure to credit and collection risk on its tradereceivables is higher in certain international markets and its ability to mitigate such risks may belimited. A significant portion of Huawei’s trade receivables was concentrated within network carriersand the portion of its trade receivables from distributors and corporate customers has been increasingrapidly during recent years. While Huawei has procedures to monitor and limit exposure to credit riskon its trade receivables, there can be no assurance that such procedures will entirely eliminate its creditrisk and avoid losses.
In addition, during the period of recession or economic downturn, Huawei saw an increase in thenumber of its customers who experienced financial difficulties, especially in many emerging marketswhere its customers were affected not only by economic conditions, but also by depreciation of localcurrencies and a lack of credit. Further, for certain international markets, uncertainties in the legalsystem or an undeveloped legal system for protection of creditors’ rights may increase Huawei’s creditrisk, which could result in a lower recovery rate for trade receivables. If customers fail to meet theirpayment obligations, Huawei may experience reduced cash flows and losses, which could materiallyadversely affect its results of operations and financial condition.
Huawei’s global operations are subject to various business, economic, political, regulatory and legalrisks.
Huawei conducts business globally and is subject to the effects of general global economic conditions aswell as conditions unique to a specific country or region. Huawei conducts business in over 170countries and regions, with a significant proportion of sales to markets in Europe, the Middle East,Africa, Asia Pacific, and China. Sales to such markets will represent an increasing portion of total sales,as developing nations and regions around the world increase their investments in telecommunications.Huawei already has extensive operations in many of these countries, which involve certain risks, such asvolatility in gross domestic product, civil disturbances, economic and political instability, nationalisationof private assets and the imposition of exchange controls. In addition, the uncertainty of the legalenvironment in some regions could limit Huawei’s ability to enforce its rights.
Huawei is required to obtain various permits or licences from different regulatory authorities in order toprovide services. Failure to comply with the terms and conditions of such permits and licences or anypotential changes to regulatory requirements by regulatory authorities in different countries may subjectHuawei to monetary penalties or jeopardise its ability to qualify for new permits and licences or torenew required permits and licences upon the expiration of the current terms. There can be no assurance
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that Huawei will be able to renew such permits, licences or other certificates upon their expiration. IfHuawei fails to obtain, renew or maintain any of the required permits or approvals and it continues toconduct such business, Huawei may be subject to various penalties, including fines and restrictions on,or the discontinuation of, its operations. Any such disruption in its business operations could materiallyand adversely affect the business, results of operations, financial condition and prospects of Huawei.
Huawei’s liquidity and its ability to meet its working capital requirements depend on access toavailable short-term and long-term capital.
If Huawei does not generate sufficient amounts of capital to support its operations, service its debt andcontinue its research and development and customer finance programmes, or if sufficient amounts ofcapital cannot be raised at the times and on the terms required by Huawei, its business is likely to beadversely affected. Access to short-term funding may decrease or become more expensive as a result ofHuawei’s operational and financial condition and market conditions or due to a deterioration of lenders’perception of Huawei’s credit quality. To provide liquidity and meet its working capital requirements,Huawei is party to certain credit facilities and has arranged for other committed and uncommitted creditlines. Huawei’s ability to draw upon those resources is dependent upon a variety of factors, includingcompliance with existing covenants, the absence of any event of default and, with respect touncommitted credit lines, the lenders’ perception of Huawei’s credit quality. There can be no assurancethat Huawei will be able to comply with its existing covenants in the future. Any failure to comply withthe covenants under any of its existing credit facilities may constitute a default under its other creditfacilities and credit lines. There can be no assurance that Huawei would be able to obtain a waiver fromdefault, to renegotiate its credit facilities, to raise additional financing from existing or new shareholdersor to repay or refinance its borrowings on acceptable terms. If a significant number of those sources ofliquidity were to be unavailable, or cannot be refinanced when they mature, this could have a materialadverse effect on Huawei’s business, results of operations and financial condition.
Enforcement of various types of regulations, sanctions and trade policies as well as changes in suchregulations, sanctions and policies in countries around the world could have a material adverse effecton Huawei’s business and results of operations.
Huawei conducts substantial operations in various countries around the world. Each regionalheadquarters manages its regional sales and production subsidiaries as well as coordinates overallbusiness activities in its geographic region. Huawei’s overseas subsidiaries engage in local sales andmarketing activities as well as product support. Huawei develops many of its products and solutionsbased on existing regulations and technical standards, its interpretation of unfinished technical standardsor there may be an absence of applicable regulations and standards. As a result, changes in various typesof regulations in each of those countries, their application and trade policies applicable to current or newtechnologies or products may have a material adverse effect on the local business and results ofoperations, which in turn may adversely affect Huawei’s business and results of operations.
Huawei’s global operations expose Huawei to a number of risks, including:
• fluctuations in foreign currency exchange rates;
• increased costs associated with maintaining the ability to understand the local markets and followtheir trends, as well as develop and maintain effective marketing and distribution presence;
• employee misconduct;
• providing efficient customer service and support in markets abroad;
• high costs relating to compliance with the commercial and legal requirements of the overseasmarkets, including those relating to labour, environment and industry-specific regulations;
• difficulty in obtaining or enforcing intellectual property rights;
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• strict foreign exchange controls and cash repatriation restrictions;
• unanticipated changes in prevailing economic conditions and regulatory requirements;
• political instability and civil unrest, cultural and religious conflicts, and acts of terrorism;
• difficulties in enforcing agreements and collecting overdue receivables through local legal systems;and
• trade barriers such as export requirements, tariffs and other restrictions and expenses.
Huawei’s overall success as a global business depends, in part, on its ability to succeed in managingsuch risks. The likelihood of the risks being realised and their potential impact on Huawei or itsbusiness partners vary from country to country and are difficult to predict with any degree of accuracy.Huawei may not be able to develop and implement policies and strategies that will be effective in eachcountry where it conducts business, and there can be no assurance that Huawei’s exposure to such risks,which may become greater as it expands its international operations, will not adversely affect Huawei’sbusiness, results of operations and financial condition in the future.
In addition, Huawei’s business is subject to regulations in each of the countries in which it, thecompanies with which Huawei works and its customers do business. Export control, tariffs or other feesor levies imposed on Huawei’s products and environmental, product safety and security and otherregulations in each of those countries that may have an adverse effect on the export, import, pricing orcosts of Huawei’s products could also have a material adverse effect on its sales and results ofoperations, which in turn may adversely affect Huawei’s business and results of operations. Any new orincreased levies and duties could result in costs which lead to higher prices for Huawei’s products,which may in turn impair their demand. In addition, changes in various types of regulations or theirapplication with respect to taxation or other fees collected by governments or governmental agenciesmay result in unexpected payments to be made by Huawei. Licence fees, environmental, health andsafety, privacy and other regulatory changes, in general, or particular to Huawei’s industry, may increasecosts and restrict operations for telecommunications carriers or Huawei.
Huawei also engages in activities in countries that are subject to economic sanctions imposed by certainother countries. Such sanctions vary over time and it is difficult for Huawei to predict the interpretation,implementation or enforcement of governmental policies or sanctions with respect to Huawei’s activities,currently or in the future. There is no assurance that the activities by Huawei in these countries will notresult in negative media which may affect investors’ perception of Huawei. Further, Huawei’s businessand results of operations may also be materially and adversely affected by regulation and trade policiesfavouring local industry participants, as well as other measures with potentially protectionist objectiveswhich host governments may take, particularly in response to difficult global economic conditions.
Huawei’s strategic acquisitions, joint ventures, investments or diversification efforts or intra-groupreorganisation, amalgamation, consolidation or merger could disrupt its ongoing business and maynot produce successful results.
Huawei engages in acquisitions, joint ventures and other strategic investments or diversification (intra-group or otherwise) from time to time to acquire new technologies and enhance its competitiveness.Huawei may also, from time to time, undertake reorganisation, amalgamation, consolidation or mergerwithin the Group to streamline its business operations and product offerings. Such endeavours mayinvolve significant risks and uncertainties, including distraction of the management from currentoperations, incurrence of significant integration expenses, inadequate return on capital investments andother issues not previously anticipated by Huawei.
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In the case of joint ventures, because results from these activities are largely dependent on industrytrends as well as the financial condition and performance of partner companies, weak trends ordisappointing performance of such partners may adversely affect the success of these activities. Thesuccess of joint ventures or alliances may also be adversely affected by the inability of Huawei and itspartners to successfully define their common objectives and address their potential conflicts of interests.If Huawei’s partnering arrangements fail to perform as expected, the ability to work with these partnersor develop new products and solutions may be constrained and this may harm Huawei’s competitiveposition in the market. Additionally, the share of any losses from, or commitments to contributeadditional capital to, such partnerships may adversely affect Huawei’s results of operations or itsfinancial position.
Huawei’s margins and profitability may be adversely affected by increasing labour costs in China.
Huawei faces continuing pressure to reduce production costs. The production processes of Huawei’sbusiness rely to a large extent on its employees. Historically, labour costs in China have beensignificantly lower than those in developed countries for technical personnel with comparable skills.However, labour costs in China are increasing. Huawei may be unable to generate sufficient productioncost savings from labour costs in the future to offset price reductions. In addition, any reduction inconsumer demand for Huawei’s products may result in decreased sales, which in turn could result in itsmargins and profitability being materially and adversely affected.
Huawei is exposed to foreign exchange currency risk.
Huawei operates its business in over 170 countries and regions around the world. Accordingly, Huaweiis exposed to foreign exchange risks arising from various currency positions. While a substantial portionof Huawei’s revenue is denominated in US dollars, euro and other foreign currencies, most of its costs,expenses, capital expenditure and dividends are incurred in Renminbi, its functional currency. As aresult, any significant appreciation of the Renminbi against the US dollar, euro or other foreigncurrencies could result in a material adverse effect on Huawei’s profitability and cash flow and mayresult in foreign exchange losses. However, there is no assurance that the Renminbi will not furtherappreciate against major foreign currencies. In addition, various government and monetary authorities indifferent countries and regions may impose (as some have done so in the past) exchange controls thatcould adversely affect an applicable exchange rate.
An unfavourable outcome of litigation could have a material adverse effect on Huawei’s business,results of operations and financial condition.
Huawei is a party to lawsuits in the normal course of its business. Litigation can be expensive, lengthy,and disruptive to normal business operations and divert the attention of Huawei’s management.Moreover, the results of complex legal proceedings are difficult to predict. An unfavourable resolutionof a particular lawsuit could have a material adverse effect on Huawei’s business, results of operationsand financial condition. Where there are lawsuits among market players, while Huawei may not bedirectly involved in such lawsuits, an unfavourable resolution of a particular lawsuit could adverselyaffect other market participants like Huawei, which in turn affects Huawei’s business, results ofoperations and financial condition.
Huawei records provisions for pending litigation when it determines that an unfavourable outcome isprobable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties oflitigation, the ultimate outcome or actual cost of settlement may vary materially from estimates. Huaweibelieves that its provisions for pending litigation are appropriate. The ultimate outcome, however, maydiffer from the provisions made, which could have a positive or negative impact on Huawei’s results ofoperations and financial condition.
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Huawei may not have sufficient insurance coverage.
Huawei has obtained insurance to cover certain potential risks and liabilities, such as properties andfixed assets, plant and equipment, inventory and transportation, and third-party liability. However,insurance companies in China offer limited business insurance products. As a result, Huawei may not beable to acquire any insurance for certain types of risks such as business liability or service disruptioninsurance for its operations in China, and its coverage may not be adequate to compensate for all lossesthat may occur, particularly with respect to loss of business or operations. Huawei does not maintainbusiness interruption insurance or key-man life insurance, and its product liability insurance may not besufficient to cover the product liabilities that it is exposed to. This could leave Huawei exposed topotential claims and losses. Any business disruption, litigation, regulatory action, outbreak of epidemicdisease or natural disaster could also expose Huawei to substantial costs and diversion of resources.There is no assurance that Huawei’s insurance coverage is sufficient to prevent it from any loss or that itwill be able to successfully claim its losses under its current insurance policy on a timely basis, or at all.If Huawei incurred any loss that is not covered by its insurance policies, or the compensated amount issignificantly less than its actual loss, its results of operations and financial condition could be materiallyand adversely affected.
Huawei may be unable to retain, motivate, develop and recruit properly skilled employees, which mayhamper its ability to implement its strategies, particularly its strategy to become more customer-centric.
Huawei’s business model is premised on having dedicated employees as its foundation. Huawei’ssuccess is dependent on its ability to retain, motivate, develop through constant competence training,and recruit properly skilled employees with a comprehensive understanding of its current and futurebusinesses, technologies, software and products. This is particularly important for achieving the keyobjective of Huawei’s business, which is to continue to be customer-centric, and the successfulimplementation of Huawei’s business strategy where it needs highly skilled, innovative and solutions-oriented personnel with strong capabilities. The implementation of Huawei’s business strategy isexpected to have a significant impact on its personnel. Competition for highly skilled and innovativepersonnel in the telecommunications industry remains intense and Huawei’s employees may be targetedaggressively by its competitors, and some employees may be receptive to such offers, leading to the lossof key personnel. Accordingly, Huawei is continuously assessing and adjusting its compensation andbenefits policies, and taking other measures to attract, retain and motivate skilled personnel aligned withits mode of working and the culture needed to implement its business strategies successfully. This willrequire significant time, attention and resources of Huawei’s senior management and others within theorganisation and may result in increased costs. However, there is no assurance that Huawei will besuccessful in attracting and retaining employees with appropriate skills, which may hamper its ability toimplement its strategies and materially harm its business and results of operations.
Huawei’s operations rely on the efficient and uninterrupted operation of complex and centralisedinformation technology systems and networks.
Huawei’s business operations rely on complex operations and communications networks, which arevulnerable to damage or disturbance from a variety of sources. Regardless of Huawei’s protectionmeasures, essentially all IT systems and communications networks are susceptible to disruption due tofailure, vandalism, computer viruses, security breaches, natural disasters, power outages and otherevents. Huawei also has a concentration of operations on certain sites, for example, for research anddevelopment, production, network operation centres, logistic centres and shared services centres, wherebusiness interruptions could cause material damage and costs. Transport of goods from suppliers, and tocustomers, could also be hampered for the reasons stated above. Although Huawei has assessed theserisks, implemented controls, performed business continuity planning and selected reputable companiesfor outsourced services, there can be no assurance that interruptions will not occur and if suchinterruptions were to occur, Huawei’s financial position and results of operations may be materially andadversely affected. In addition, Huawei does not carry any business interruption insurance, which is notrequired under PRC law. Accordingly, Huawei would not be covered or compensated by insurance in
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respect of losses, damages, claims and liabilities arising from or in connection with incidents or thirdparty liability, which losses, damages, claims or liabilities could have a material adverse effect on itsbusiness and results of operations.
There may be less publicly available information about Huawei than is available for listed companies.
Huawei is not a listed company. There may be less publicly available information about Huawei than isregularly made available by publicly listed companies in Hong Kong and other countries. Corporategovernance rules and internal control measures required of a listed company complying with applicablelisting rules are not mandatorily applied to Huawei. As such, in making an investment decision,investors must rely upon their own examination of Huawei, the terms of the offering and the financialinformation in this Offering Circular.
Huawei’s financial information as at and for the year ended 31 December 2012 regarding certainaspects has not been restated and may not be comparable to Huawei’s financial information as at andfor the years ended 31 December 2013 and 2014 contained in Huawei’s 2014 Financial Statements.
Certain comparative amounts with respect to the year ended 31 December 2013 included in Huawei’s2014 Financial Statements have been restated. In 2014, the management of Huawei determined thatcertain operating support activities in Huawei’s selling organisation, previously recorded as sellingexpenses, would be more appropriately presented as administrative expenses, and that the productmanagement activities for product divisions, previously presented as selling expenses, should bechanged to research and development expenses to more accurately reflect their function. Themanagement of Huawei also further determined that certain cash received from customers would bemore appropriately presented as advances received within other payables, rather than being offset againstthe receivables due from the same customers. Huawei’s senior management also adjusted the segmentreporting solution based on the development of the business. The comparatives as at and for the yearended 31 December 2013 have been represented to comply with the presentation in 2014. These changesin presentation have had no impact on reported operating profit or net assets. For more details, pleasesee note 40 to Huawei’s 2014 Financial Statements included elsewhere in this Offering Circular.
Huawei’s financial information as at and for the year ended 31 December 2012 which is included in thisOffering Circular has not been restated to reflect such reclassifications, restatements or amendments.Therefore, the consolidated financial information as at and for the year ended 31 December 2012 are notdirectly comparable to Huawei’s consolidated financial information as at and for the years ended 31December 2013 and 2014 contained in Huawei’s 2014 Financial Statements contained herein. Potentialinvestors must exercise caution and make their own assessments when using Huawei’s financialinformation as at and for the year ended 31 December 2012 to evaluate Huawei’s financial condition andresults of operations and the perceived risk associated with an investment in the Bonds.
Potential health risks related to electromagnetic fields.
The mobile telecommunications industry is subject to claims that mobile handsets and other devices thatgenerate electromagnetic fields expose users to health risks. At present, a substantial number ofscientific studies conducted by various independent research bodies have indicated that electromagneticfields, at levels within the limits prescribed by public health authority safety standards andrecommendations, cause no adverse effects to human health. However, any perceived risk or newscientific findings of adverse health effects of mobile communication devices and equipment couldadversely affect Huawei through a reduction in sales of its consumer devices or through liability claims.
Although Huawei’s products are designed to comply with all current safety standards andrecommendations regarding electromagnetic fields, Huawei cannot guarantee that it will not become thesubject of product liability claims or be held liable for such claims or be required to comply with futureregulatory changes that may have an adverse effect on its business.
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Risks relating to the PRC
Huawei’s business, financial condition and results of operations may be affected by PRC economic,political and social conditions and PRC government policies.
A material portion of Huawei’s business, assets and operations is located in the PRC. Accordingly, itsfinancial condition, results of operations and business outlook are, to a significant degree, subject toeconomic, political, legal and social conditions and developments in the PRC. Many of the productionsites of Huawei’s suppliers are also located in the PRC. In the event that the PRC is generally affectedby adverse conditions that disrupt production and/or deliveries from any of Huawei’s suppliers, thiscould adversely affect Huawei’s ability to deliver its products on a timely basis, which may materiallyadversely affect its business and results of operations.
The PRC economy differs from that of developed countries in many aspects, including governmentinvolvement, level of development, growth rate, foreign exchange control and allocation of resources.
Although the PRC’s economy has been transitioning from a planned economy to a more market-orientedeconomy for more than three decades, a substantial portion of productive assets in China is still ownedby the PRC government. The PRC government also exercises significant control over China’s economicgrowth by allocating resources, setting monetary policy and providing preferential treatment to particularindustries or companies. Although the PRC government has implemented economic reform measures tointroduce market forces and establish sound corporate governance in business enterprises, sucheconomic reform measures may be adjusted, modified or applied inconsistently from industry to industryor across different regions of the country. As a result, Huawei may not benefit from certain of suchmeasures.
The PRC has been one of the fastest-growing economies in the world, as measured by GDP growth, inrecent years. However, there is no assurance that the PRC economy will continue to grow at such rates.The PRC government has the power to implement macroeconomic control measures to regulate the PRCeconomy. Emerging from the peak of the global financial crisis, some countries have started to withdrawthe stimulus packages previously executed and implement more moderate monetary policies. The PRCwithdrew its economic stimulus plan implemented during the financial crisis and returned to its generalpolicy directions. The withdrawal of the economic stimulus plan and other supportive economic policiesmay cause interest rates to increase which would in turn increase Huawei’s costs of financing andimpede some of its investment plans. In addition, the PRC government has implemented strictercontrolling measures on the real estate market and resumed reform of the Renminbi exchange rate. Asthe PRC government continues to regulate the economy by using monetary and fiscal policies, Huawei’sbusiness, financial condition and results of operations could be adversely affected, which in turn mayadversely affect the Issuer’s ability to service the Bonds and to satisfy its other obligations under theBonds, and the ability of Huawei to perform its obligations under the Guarantee.
The PRC legal system may have inherent uncertainties that could limit the legal protections availableto or against Huawei.
Huawei conducts part of its operations under PRC laws, and Huawei and some of Huawei’s subsidiariesare organised under PRC laws. The PRC legal system is based on written statutes. Since the late 1970s,the PRC has promulgated laws and regulations dealing with legal relations in respect of such economicmatters as foreign investment, corporate organisation and governance, commerce, taxation and trade,with a view towards developing a comprehensive system of commercial law. However, as many of theselaws and regulations are relatively new and continue to evolve, these laws and regulations may besubject to different interpretations and inconsistently enforced. In addition, there is only a limitedvolume of published court decisions, which may be cited for reference but are not binding onsubsequent cases and have limited precedential value. These uncertainties relating to the interpretationand implementation of the PRC laws and regulations may adversely affect the legal protections andremedies that are available to Huawei in its operations and to Bondholders.
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Particularly, any change in the income tax rate in China may have a negative impact on Huawei’s resultsof operations. The rate of income tax chargeable on the subsidiaries of Huawei in China may varydepending on the availability of preferential tax treatment. The PRC Enterprise Income Tax Law (the‘‘EIT Law’’) that became effective on 1 January 2008 sets a uniform tax rate of 25% for all enterprises,provided that a high-tech enterprise may enjoy the preferential income tax rate of 15% after completingcertain procedures with relevant PRC tax authorities. Some of Huawei’s subsidiaries are entitled to thepreferential income tax rate of 15% based on their qualification as a high-tech enterprise. However,there can be no assurance that their high-tech enterprise qualification status will be renewed and thepreferential income tax rate will be granted by the relevant PRC tax authorities upon the expiration ofsuch status.
As the PRC legal system develops, there can be no assurance that changes in such laws and regulations,including but not limited to the EIT Law regarding the preferential tax rate, or the interpretation orenforcement of such laws and regulations, will not have a material adverse effect on Huawei’s business,financial condition and results of operations.
Huawei is subject to the PRC government’s controls on currency conversion and future movements inforeign currency exchange rates.
A majority of Huawei’s revenues are denominated in Renminbi and they may need to be converted intoother currencies to meet its foreign currency obligations. The value of Renminbi against the US dollarand other currencies fluctuates and is affected by many factors, such as changes in political andeconomic conditions in the PRC and globally. Starting from 1994, the conversion of Renminbi intoforeign currencies, including Hong Kong dollars and US dollars, was based on rates set daily by PBOCbased on the previous business day’s inter-bank foreign exchange market rates and the current exchangerates on the world financial markets. For more than 10 years, the official exchange rate for conversionof Renminbi to US dollars was generally stable. On 21 July 2005, the PRC government introduced amanaged floating exchange rate system to allow the value of Renminbi to fluctuate within a regulatedband based on market supply and demand and by reference to a basket of currencies. On the same day,the value of Renminbi appreciated by approximately 2% against the US dollar.
In July 2008, the PRC government announced that its exchange rate regime would change to a managedfloating mechanism based on market supply and demand. Given domestic and overseas economicdevelopments, PBOC decided to further adjust the RMB exchange rate regime in April 2012 to enhancethe flexibility of the RMB exchange rate. On 17 March 2014, PBOC continued to expand the floatingrange of the RMB against the US dollar. The PRC government may make further adjustments to theexchange rate system in the future. Any appreciation of Renminbi against the US dollar or any otherforeign currency may result in a decrease in the value of Huawei’s foreign currency-denominated assets.
Conversely, any devaluation of Renminbi may adversely affect the value of Huawei’s assets in Renminbiterms.
In addition, Huawei is required to obtain approval from SAFE before converting foreign currencies intoRenminbi for non-current account transactions. All these factors could materially and adversely affectHuawei’s business, financial condition and results of operations.
There can be no assurance of the accuracy or comparability of certain facts, forecasts and statisticscontained in this Offering Circular with respect to Huawei, the PRC, its economy or itstelecommunications industry.
Certain facts, forecasts and statistics in this Offering Circular relating to the PRC, its economy, itstelecommunications industries and Huawei’s market share and ranking are derived from various officialand other publicly available sources which are generally believed to be reliable. However, Huaweicannot guarantee the quality and reliability of such source materials. In addition, these facts, forecastsand statistics have not been independently verified by Huawei or any of their respective directors,employees, representatives, affiliates or advisers and, therefore, none of them makes any representation
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as to the accuracy or fairness of such facts, forecasts and statistics, which may not be consistent withother information compiled within or outside the PRC and may not be complete or up to date. Huaweihas taken reasonable care in reproducing or extracting the information from such sources.
However, because of possibly flawed or ineffective methodologies underlying the published informationor discrepancies between the published information and market practice and other problems, these facts,forecasts and other statistics may be inaccurate or may not be comparable from period to period or becomparable to facts, forecasts or statistics produced for other economies and should not be unduly reliedupon.
Any force majeure events, including the outbreak, or threatened outbreak, of any severecommunicable diseases in Hong Kong or the PRC, could materially and adversely affect Huawei’sbusiness, financial condition and results of operations.
Any force majeure events, including the outbreak, or threatened outbreak, of any severe communicabledisease (such as severe acute respiratory syndrome or avian influenza) in Hong Kong or the PRC, couldmaterially and adversely affect the overall business sentiment and environment in the PRC, particularlyif such outbreak is inadequately controlled. This, in turn, could materially and adversely affect domesticconsumption, labour supply and, possibly, the overall gross domestic product (‘‘GDP’’) growth of thePRC. Any labour shortages on contraction or slowdown in the growth of domestic consumption in thePRC could materially and adversely affect Huawei’s business, financial condition and results ofoperations. In addition, if any of Huawei’s employees are affected by any severe communicable disease,it could adversely affect or disrupt production levels and operations at the relevant plants and materiallyand adversely affect Huawei’s business, financial condition and results of operations, which may alsoinvolve a closure of Huawei’s facilities to prevent the spread of the disease. The spread of any severecommunicable disease in the PRC may also affect the operations of Huawei’s customers and suppliers,which could materially and adversely affect Huawei’s business, financial condition and results ofoperations.
It may be difficult to effect service of process upon Huawei or its Directors, Supervisors or seniormanagement who reside in the PRC, or to enforce against them or Huawei in the PRC any judgmentsobtained from non-PRC courts.
Most of Huawei’s Directors, Supervisors and senior management reside within the PRC. The PRC doesnot have treaties providing for the reciprocal recognition and enforcement of judgments of courts withthe United States, the United Kingdom, Japan and many other countries. As a result, it may not bepossible for investors to effect service of process upon Huawei or those persons in the PRC, or toenforce against Huawei or those persons in the PRC, any judgments obtained from non-PRC courts. Inaddition, recognition and enforcement in the PRC of judgments of a court of any other jurisdiction inrelation to any matter not subject to a binding arbitration provision may be difficult or impossible.
Risks relating to the Bonds and the Guarantee
The Bonds and the Guarantee are unsecured obligations.
The Bonds and the Guarantee are unsecured obligations of the Issuer and the Guarantor respectively.The repayment of the Bonds and payment under the Guarantee may be adversely affected if:
• the Issuer or the Guarantor enters into bankruptcy, liquidation, reorganisation or other winding-upproceedings;
• there is a default in payment under the Issuer’s or the Guarantor’s future secured indebtedness orother unsecured indebtedness; or
• there is an acceleration of any of the Issuer’s or the Guarantor’s indebtedness.
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If any of these events were to occur, the Issuer’s or the Guarantor’s assets may not be sufficient to payamounts due on the Bonds.
The Issuer is a special purpose vehicle with no business activities of its own and will be dependent onfunds from its affiliates to make payments under the Bonds.
The Issuer is a wholly-owned indirect subsidiary of the Guarantor formed for the sole purpose of issuingthe Bonds or other debt securities and will on-lend the entire proceeds from the issue of the Bonds to itsaffiliates for general corporate purposes. The Issuer does not and will not have any net assets other thansuch on-lent loans and its ability to make payments under the Bonds depends on timely payments undersuch loans. In the event that the affiliates of the Issuer do not make such payments due to limitation insuch loans or other agreements, lack of available cash flow or other factors, the Issuer’s ability to makepayments under the Bonds could be adversely affected.
Claims by holders of the Bonds are structurally subordinated to claims by creditors of the subsidiariesof the Guarantor.
The Guarantor is primarily a holding company and its ability to make payments in respect of the Bondsdepends largely upon the receipt of dividends, distributions, interests or advances from its subsidiaries.The ability of the subsidiaries of the Guarantor to pay dividends and other amounts to the Guarantormay be subject to their profitability, restrictions contained in the debt instruments of such subsidiariesand the applicable laws. In addition, if any of the subsidiaries of the Guarantor raise capital by issuingequity securities to third parties, dividends declared and paid with respect to such shares would not beavailable to the Guarantor to make payments on the Bonds. These restrictions could reduce the amountsthat the Guarantor receives from its subsidiaries, which would restrict its ability to perform the paymentobligations under the Guarantee. Payments under the Guarantee, and therefore the Bonds, arestructurally subordinated to all existing and future liabilities and obligations of each of the subsidiariesof the Guarantor. Claims of creditors of such companies will have priority as to the assets of suchcompanies over the Guarantor and its creditors, including holders of the Bonds.
The Issuer or the Guarantor may be unable to redeem the Bonds.
On certain dates, including the occurrence of any of the events set out in ‘‘Conditions of the Bonds –
Redemption upon Relevant Event’’, and upon maturity of the Bonds, the Issuer, failing which theGuarantor may, and at maturity will, be required to redeem all of the Bonds. If such an event were tooccur, the Issuer or, as the case may be, the Guarantor may not have sufficient cash on hand and maynot be able to arrange financing to redeem the Bonds in time, or on acceptable terms, or at all. Failureto repay or redeem tendered Bonds by the Issuer or the Guarantor would constitute an event of defaultunder the Bonds, which may also constitute a default under the terms of other indebtedness of theGuarantor.
Changes in interest rates may have an adverse effect on the price of the Bonds.
The Bondholders may suffer unforeseen losses due to fluctuations in interest rates. Generally, a rise ininterest rates may cause a fall in the prices of the Bonds, resulting in a capital loss for the Bondholders.However, the Bondholders may reinvest the interest payments at higher prevailing interest rates.Conversely, when interest rates fall, the prices of the Bonds may rise. The Bondholders may enjoy acapital gain but interest payments received may be reinvested at lower prevailing interest rates.
Investment in the Bonds is subject to exchange rate risks.
Investment in the Bonds is subject to exchange rate risks. The value of the US dollar against theRenminbi and other foreign currencies fluctuates and is affected by changes in the United States andinternational political and economic conditions and by many other factors. All payments of interest andprincipal with respect to the Bonds will be made in US dollars. As a result, the value of these US dollar
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payments may vary with the prevailing exchange rates in the marketplace. If the value of the US dollardepreciates against the Renminbi or other foreign currencies, the value of a Bondholder’s investment inRenminbi or other applicable foreign currency terms will decline.
There may not be a liquid market for the Bonds, and holders may not be able to sell their Bonds atan attractive price or at all.
The Bonds are a new issue of securities for which there is currently no trading market. If the Bonds aretraded after they are issued, they may trade at a discount from their initial offering price, depending onmany factors, including prevailing interest rates, the market for similar securities, general economicconditions and the Guarantor’s financial condition, performance and prospects. If an active tradingmarket for the Bonds does not develop or continue, the market price and liquidity of the Bonds may beadversely affected. The Issuer has been advised that the Joint Lead Managers intend to make a market inthe Bonds, but the Joint Lead Managers are not obligated to do so and may discontinue such market-making activity at any time at the sole discretion of the Joint Lead Managers.
There may be uncertainties relating to the performance of the Guarantor’s obligations under theGuarantee.
Under the Guarantee, the Guarantor will unconditionally and irrevocably guarantee the due payment infull of all sums expressed to be payable by the Issuer under the Bonds. The obligations of the Guarantorunder the Guarantee will be contained in a trust deed to be entered into on or about the Issue Date (the‘‘Date of Guarantee’’). Pursuant to the Notice of the Promulgation of the Administrative Regulations onCross-border Foreign Exchange Guarantees issued by the State Administration of Foreign Exchange(國
家外匯管理局關於發布《跨境擔保外匯管理規定》的通知)on 12 May 2014 (the ‘‘SAFE Notice’’),where the guarantor is a non-financial institution or enterprise (hereinafter referred to as a ‘‘non-banking institution’’), registration shall be made with the local foreign exchange authority within 15business days after the execution of the guarantee in relation to an offshore lending guaranteedinternally by onshore entities. Any such registration so filed by the guarantor as a non-bankinginstitution shall be subject to a procedural review by the local foreign exchange authority forauthenticity and regulatory compliance before such registration is effected. Failure on the part of theguarantor to complete such registration procedures as required by law shall not prejudice the validity ofthe guarantee. The Guarantor is required to register the Guarantee with the Shenzhen Branch of SAFEwithin 15 business days after its execution pursuant to the SAFE Notice. The Issuer’s PRC legal counselhas advised that the failure to register the Guarantee will not affect the legal, valid and binding effect ofthe Guarantee on the Guarantor under PRC law. Pursuant to the SAFE Notice, a guarantor which is anon-banking institution may approach a bank directly for the purchase and payment of the foreignexchange as required under the guarantee to the external party on presentation of the registeredguarantee documentation. Where an obligation under the guarantee is triggered in respect of an offshorelending which is guaranteed by onshore entities, an onshore guarantor becoming a creditor of anexternal debt shall register its right as a creditor as required by law. If the Guarantee has not beenregistered with the Shenzhen Branch of SAFE within 15 business days after its execution, SAFE may,pursuant to the SAFE Notice, impose punishment on the Guarantor under the Regulations of thePeople’s Republic of China on Foreign Exchange Control(中華人民共和國外匯管理條例). If theGuarantor fails to register the Guarantee within the prescribed timeframe at the time of making paymentsunder the Guarantee, the Guarantor will not be able to purchase or remit foreign currency in order forthe Guarantor to fulfil its payment obligations under the Guarantee. Upon the performance or dischargeof the obligations of the Guarantor, the Guarantor shall go through the registration procedures asrequired in accordance with the applicable PRC laws and regulations. The Guarantor intends to registerthe Guarantee as soon as practicable and in any event before the prescribed timeframe (being 15business days after its execution). In the opinion of the Issuer’s PRC legal counsel, there is no materiallegal impediment to complete such registration subject to procedural requirements as set forth inapplicable provisions of PRC laws.
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Under the EIT Law, the Issuer may be classified as a PRC tax resident enterprise. Such classificationcould result in unfavourable tax consequences to the Issuer and its Bondholders.
Pursuant to the EIT Law and its implementation regulations, enterprises that are established under thelaws of foreign countries and regions (including Hong Kong, Macau and Taiwan) but whose ‘‘de factomanagement bodies’’ are within the territory of China will be treated as PRC tax resident enterprises forthe purpose of the EIT Law and they are required to pay enterprise income tax at the rate of 25% inrespect of their income sourced from both within and outside China. The implementing rules of the EITLaw define ‘‘de facto management’’ as ‘‘substantial and overall management and control over theproduction and operations, personnel, accounting, and properties’’ of the enterprise. However, it isstill unclear how the PRC tax authorities will determine whether an entity will be classified as a ‘‘PRCtax resident enterprise’’. If the relevant PRC tax authorities decide, in accordance with applicable taxrules and regulations, that the ‘‘de facto management body’’ of the Issuer is within the territory of thePRC, the Issuer may be held to be a PRC tax resident enterprise for the purpose of the EIT Law and besubject to enterprise income tax at the rate of 25% for its income sourced from both within and outsidethe PRC. As confirmed by the Issuer, as at the date of this Offering Circular, the Issuer has not beengiven notice or informed by the PRC tax authorities that it is considered as a PRC tax resident enterprisefor the purpose of the EIT Law. Furthermore, as described in ‘‘Taxation – PRC’’, in the event the Issueris deemed to be a PRC tax resident enterprise by the PRC tax authorities in the future, interest payableto ‘‘non-resident enterprise’’ holders of the Bonds and capital gains realised by ‘‘non-residententerprise’’ holders of Bonds may be treated as income derived from sources within China and besubject to PRC withholding tax at a rate of 10% or a lower rate for holders who qualify for the benefitsof a double-taxation treaty with China. If the Issuer is required under the EIT Law to withhold PRC taxon interest payable to non-resident Bondholders who are ‘‘non-resident enterprises’’, the Issuer will berequired to pay such additional amounts as will result in receipt by a holder of a Bond of such amountsas would have been received by the holder had no such withholding been required. The requirement topay additional amounts will increase the Issuer’s cost of servicing interest payments on the Bonds, andcould have a material adverse effect on the Issuer’s ability to pay interest on, and repay the principalamount of, the Bonds, as well as the Issuer’s profitability and cashflow.
Gains from the Bonds may become subject to income taxes under PRC tax laws.
Under the PRC Enterprise Income Tax Law, the PRC Individual Income Tax Law and the relevantimplementing rules, as amended from time to time, any gain realised on the transfer of the Bonds by anon-PRC resident enterprise or individual holders may be subject to PRC EIT or PRC individual incometax (‘‘IIT’’) if such gain is income derived from sources within the PRC. However, uncertainty remainsas to whether the gain realised from the transfer of the Bonds by a non-PRC resident enterprise orindividual holders would be treated as income derived from sources within the PRC and be subject tothe EIT or IIT. This will depend on how the PRC tax authorities interpret, apply or enforce the PRCEnterprise Income Tax Law, the PRC Individual Income Tax Law and the relevant implementing rules.According to the arrangement between the PRC and Hong Kong for the avoidance of double taxation,Bondholders who are residents of Hong Kong, including enterprise holders and individual holders, willnot be subject to the PRC EIT or IIT on capital gains derived from a sale or exchange of the Bonds.
In addition, as the Guarantor is a resident enterprise, if the Issuer is not able to make payments underthe Bonds and the Guarantor fulfils the payment obligations of the Guarantees, the Guarantor mustwithhold PRC income tax on payments with respect to the Bonds to non-PRC resident enterprise holdersat the rate of 10% and to non-resident individual holders at a rate of 20%. Applicable tax treaties mayprovide for lower tax rates.
Therefore, if a non-PRC resident enterprise or individual resident holders are required to pay PRCincome tax on gains derived from the Bonds (such EIT is currently levied at the rate of 10% of gainsrealised and such IIT is currently levied at the rate of 20% of gains realised (with deduction ofreasonable expenses), unless there is an applicable tax treaty between the PRC and the jurisdiction in
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which such non-PRC resident enterprise or individual resident holders of the Bonds reside that reducesor exempts the relevant EIT or IIT), the value of their investment in the Bonds may be materially andadversely affected.
A tax for withholding may be payable under the United States Foreign Account Tax Compliance Actif an investor or custodian of the Bonds is unable to receive payments free of withholding.
While the Bonds are in global form and held within the Clearing Systems, in all but the most remotecircumstances, it is not expected that the United States Foreign Account Tax Compliance Act(‘‘FATCA’’) will affect the amount of any payment received by the Clearing Systems (see ‘‘Taxation –
FATCA’’). However, FATCA may affect payments made to custodians or intermediaries in thesubsequent payment chain leading to the ultimate investor if any such custodian or intermediarygenerally is unable to receive payments free of FATCA withholding. It also may affect payment to anyultimate investor that is a financial institution that is not entitled to receive payments free of withholdingunder FATCA, or an ultimate investor that fails to provide its broker (or other custodian or intermediaryfrom which it receives payment) with any information, forms, other documentation or consents that maybe necessary for the payments to be made free of FATCA withholding. Investors should choose thecustodians or intermediaries with care (to ensure each is compliant with FATCA or other laws oragreements related to FATCA), provide each custodian or intermediary with any information, forms,other documentation or consents that may be necessary for such custodian or intermediary to make apayment free of FATCA withholding. Investors should consult their own tax adviser to obtain a moredetailed explanation of FATCA and how FATCA may affect them. The Issuer’s and the Guarantor’sobligations under the Bonds and the Guarantee of the Bonds are discharged once they have madepayments to, or to the order of, the common depositary for the Clearing Systems (as registered holder ofthe Bonds) and the Issuer and the Guarantor have therefore no responsibility for any amount thereaftertransmitted through the Clearing Systems and custodians or intermediaries. Further, foreign financialinstitutions in a jurisdiction which has entered into an intergovernmental agreement with the UnitedStates (an ‘‘IGA’’) are generally not expected to be required to withhold under FATCA or an IGA (orany law implementing an IGA) from payments they make.
The Bonds are redeemable in the event of certain withholding taxes being applicable.
No assurances are made by the Issuer or the Guarantor as to whether or not payments in respect of theBonds shall be made free and clear of, and without withholding or deduction for, or on account of, anypresent or future taxes, duties, assessments or governmental charges of whatever nature imposed orlevied by or on behalf of the British Virgin Islands or the PRC or any political subdivision or anyauthority therein or thereof having power to tax. Although pursuant to the Conditions of the Bonds, theIssuer and the Guarantor are required to gross up payments on account of any such withholding taxes ordeductions, the Issuer also has the right to redeem the Bonds at any time in the event the Issuer or theGuarantor has or will become obliged to pay additional amounts on account of any present or futuretaxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalfthe British Virgin Islands or the PRC (only where such tax or withholding is in excess of 10 per cent.)or any political subdivision or any authority therein or thereof having power to tax as a result of anychange in, or amendment to, the laws or regulations of the British Virgin Islands or the PRC or anypolitical subdivision or any authority therein or thereof having power to tax, or any change in, oramendment to, the application or official interpretation of such laws or regulations, which change oramendment becomes effective on or after 12 May 2015.
The Bonds will be represented by a Global Certificate and holders of a beneficial interest in a GlobalCertificate must rely on the procedures of the Clearing Systems.
The Bonds will be represented by beneficial interests in the Global Certificate. The Global Certificatewill be deposited with a common depositary for Euroclear and Clearstream, Luxembourg. Except in thelimited circumstances described in the Global Certificate, investors will not be entitled to receivedefinitive certificates. The Clearing System will maintain records of the beneficial interests in the GlobalCertificate. While the Bonds are represented by the Global Certificate, investors will be able to trade
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their beneficial interests only through the Clearing Systems. While the Bonds are represented by theGlobal Certificate, the Issuer, failing which, the Guarantor, will discharge its payment obligations underthe Bonds by making payments to the relevant Clearing System for distribution to their account holders.A holder of a beneficial interest in the Global Certificate must rely on the procedures of the relevantClearing System to receive payments under the Bonds. Neither the Issuer nor the Guarantor has anyresponsibility or liability for the records relating to, or payments made in respect of, beneficial interestsin the Global Certificate. Holders of beneficial interests in the Global Certificate will not have a directright to vote in respect of the Bonds. Instead, such holders will be permitted to act only to the extentthat they are enabled by the relevant Clearing System to appoint appropriate proxies.
If the Issuer or the Guarantor is unable to comply with the restrictions and covenants contained in itsdebt agreements, including the Bonds, an event of default could occur under the terms of suchagreements, which could cause repayment of such debt to be accelerated.
If the Issuer or the Guarantor is unable to comply with its current or future debt and other agreements,there could be a default under the terms of these agreements. In the event of a default under theseagreements, the holders of the debt could terminate their commitments to lend to the Issuer or theGuarantor, accelerate the debt and declare all amounts borrowed due and payable or terminate theagreements, whichever the case may be. Furthermore, some of the Issuer’s or the Guarantor’s debtagreements may contain cross-acceleration or cross-default provisions. As a result, the Issuer’s or theGuarantor’s default under one debt agreement may cause the acceleration of debt, including the Bonds,or result in a default under other debt agreements of the Issuer or the Guarantor. If any of these eventsoccur, there can be no assurance that the Issuer’s or the Guarantor’s assets and cashflow will besufficient to repay in full all of its indebtedness, or that the Issuer or the Guarantor will be able to findalternative financing. Even if the Issuer or the Guarantor can obtain alternative financing, there can beno assurance that such financing would be on terms that are favourable or acceptable to the Issuer or theGuarantor.
The bankruptcy laws of the British Virgin Islands and the PRC may differ from those of otherjurisdictions with which the holders of the Bonds are familiar.
The Issuer and the Guarantor are incorporated under the laws of the British Virgin Islands and the PRC,respectively. Any bankruptcy proceeding relating to the Issuer and the Guarantor, even if brought inother jurisdictions, would likely involve British Virgin Islands or PRC bankruptcy laws, the proceduraland substantive provisions of which may differ from comparable provisions of the local insolvency lawsof jurisdictions with which the holders of the Bonds are familiar.
The liquidity and price of the Bonds following the offering may be volatile.
The price and trading volume of the Bonds may be highly volatile. Factors such as variations in theIssuer’s or the Guarantor’s turnover, earnings and cashflows, proposals for new investments, strategicalliances or acquisitions, changes in interest rates, fluctuations in price for comparable companies,government regulations and changes thereof applicable to the telecommunications industry and generaleconomic conditions nationally or internationally could cause the price of the Bonds to change. Anysuch developments may result in large and sudden changes in the trading volume and price of theBonds. There is no assurance that these developments will not occur in the future.
The Bonds have a limited upside.
The Bonds carry a fixed interest rate which is paid in US dollars semi-annually in arrear. Upon maturity,the Issuer will pay investors the principal amount of the Bonds plus any unpaid accrued interest. Themaximum return on an investment in the Bonds is limited to these interest payments in US dollars. Asthe Bonds are fixed income securities which are structured to provide investors with returns primarilythrough regular interest payments thereon, investors who hold the Bonds through to maturity or whodispose of the Bonds in the secondary market may not realise any capital gain.
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The Trustee may request Bondholders to provide an indemnity, security and/or pre-funding to itssatisfaction.
In certain circumstances, including without limitation the giving of notice pursuant to Condition 11.1 ofthe Conditions of the Bonds and taking enforcement steps pursuant to Condition 12 of the Conditions ofthe Bonds, the Trustee may, at its sole discretion, request Bondholders to provide an indemnity, securityand/or pre-funding to its satisfaction before it takes actions on behalf of Bondholders. The Trustee shallnot be obliged to take any such actions if not indemnified, secured and/or pre-funded to its satisfaction.Negotiating and agreeing to an indemnity, security and/or pre-funding can be a lengthy process and mayimpact on when such actions can be taken. The Trustee may not be able to take actions, notwithstandingthe provision of an indemnity, security and/or pre-funding to it, in breach of the terms of the Trust Deedor the Conditions of the Bonds and in such circumstances, or where there is uncertainty or dispute as tothe applicable laws or regulations, to the extent permitted by the agreements and the applicable laws andregulations, it will be for the Bondholders to take such actions directly.
The Bonds may not be a suitable investment for all investors.
The Bonds are complex financial instruments and may be purchased as a way to reduce risk or enhanceyield with an understood, measured, appropriate addition of risk to an investor’s overall investmentportfolio. A potential investor should not invest in the Bonds unless it has the expertise (either alone orwith the help of a financial adviser) to evaluate how the Bonds will perform under changing conditions,the resulting effects on the value of such Bonds and the impact this investment will have on thepotential investor’s overall investment portfolio.
Each potential investor in the Bonds must determine the suitability of such an investment in light of itsown circumstances. In particular, each potential investor should:
(i) have sufficient knowledge and experience to make a meaningful evaluation of the Bonds, themerits and risks of investing in the Bonds or any applicable supplement;
(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of itsparticular financial situation, an investment in the Bonds and the impact such investment will haveon its overall investment portfolio;
(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in theBonds;
(iv) understand thoroughly the terms of the Bonds and be familiar with the behaviour of any relevantindices and financial markets; and
(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios foreconomic, interest rate and other factors that may affect its investment and its ability to bear theapplicable risks.
Additional procedures may be required to be taken to bring English law governed matters or disputesto the Hong Kong courts and the Bondholders would need to be subject to the exclusive jurisdictionof the Hong Kong courts. There is also no assurance that the PRC courts will recognise and enforcejudgments of the Hong Kong courts in respect of English law governed matters or disputes.
The Conditions of the Bonds and the transaction documents are governed by English law, whereasparties to these documents have submitted to the exclusive jurisdiction of the Hong Kong courts. Inorder to hear English law governed matters or disputes, Hong Kong courts may require certainadditional procedures to be taken. Under the Arrangement on Reciprocal Recognition and Enforcementof Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong KongSpecial Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned(關
於內地與香港特別行政區法院相互認可和執行當事人協議管轄的民商事案件判決的安排), judgments
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of Hong Kong courts are likely to be recognised and enforced by the PRC courts where the contractingparties to the transactions pertaining to such judgments have agreed to submit to the exclusivejurisdiction of Hong Kong courts. However, recognition and enforcement of a Hong Kong courtjudgment could be refused if the PRC courts consider that the enforcement of such judgment is contraryto the social and public interest of the PRC or meets other circumstances specified by the Arrangementon Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by theCourts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice ofCourt Agreements between Parties Concerned. While it is expected that the PRC courts will recogniseand enforce a judgment given by Hong Kong courts governed by English law, there can be no assurancethat the PRC courts will do so for all such judgments as there is no established practice in this area.Compared to other similar debt securities issuances in the international capital markets where therelevant holders of the debt securities would not typically be required to submit to an exclusivejurisdiction, the Bondholders will be deemed to have submitted to the exclusive jurisdiction of the HongKong courts, and thus the Bondholders’ ability to initiate a claim outside of Hong Kong will be limited.
The Issuer may issue additional Bonds in the future.
The Issuer may, from time to time, and without prior consultation of the holders of the Bonds create andissue further Bonds (See ‘‘Conditions of the Bonds – Further Issues’’) or otherwise raise additionalcapital through such means and in such manner as it may consider necessary. There can be no assurancethat such future issuance or capital raising activity will not adversely affect the market price of theBonds.
Decisions that may be made on behalf of all holders of the Bonds may be adverse to the interests ofindividual holders of the Bonds.
The Conditions of the Bonds contain provisions for calling meetings of holders of the Bonds to considermatters affecting their interests generally. These provisions permit defined majorities to bind all holdersof the Bonds including holders who did not attend and vote at the relevant meeting and holders whovoted in a manner contrary to the majority. Furthermore, there is a risk that the decision of the majorityof holders of the Bonds may be adverse to the interests of the individual Bondholders.
Modifications and waivers may be made in respect of the Conditions of the Bonds and the Trust Deedby the Trustee or less than all of the holders of the Bonds.
The Conditions of the Bonds provide that the Trustee may, without the consent of Bondholders, agree toany modification of the Trust Deed, the Conditions of the Bonds and/or the Agency Agreement which inthe opinion of the Trustee will not be materially prejudicial to the interests of Bondholders and to anymodification of the Trust Deed, the Conditions of the Bonds and/or the Agency Agreement which in theopinion of the Trustee is of a formal, minor or technical nature or is to correct a manifest error or anerror which in the opinion of the Trustee is proven.
In addition, the Trustee may, without the consent of the Bondholders, waive or authorise any breach orproposed breach of the Trust Deed, the Conditions of the Bonds and/or the Agency Agreement (otherthan a proposed breach, or a breach relating to the subject of certain reserved matters) if, in the opinionof the Trustee, the interests of the Bondholders will not be materially prejudiced thereby.
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CONDITIONS OF THE BONDS
The following terms and conditions (the ‘‘Conditions’’) of the Bonds (subject to amendment and exceptfor the sentences in italics) will be endorsed on the Certificates issued in respect of the Bonds.
The U.S.$1,000,000,000 4.125 per cent. Guaranteed Bonds due 2025 (the ‘‘Bonds’’, which expressionshall in these Conditions, unless the context otherwise requires, include any further bonds issuedpursuant to Condition 18 and forming a single series with the Bonds) of Proven Honour Capital Limited(the ‘‘Issuer’’) are constituted by a trust deed (the ‘‘Trust Deed’’) dated 19 May 2015 (the ‘‘IssueDate’’) made between the Issuer, Huawei Investment & Holding Co., Ltd. (the ‘‘Guarantor’’) asguarantor and DB Trustees (Hong Kong) Limited (the ‘‘Trustee’’, which expression shall include itssuccessor(s)) as trustee for the holders of the Bonds (the ‘‘Bondholders’’).
The statements in these Conditions include summaries of, and are subject to, the detailed provisions ofand definitions in the Trust Deed. Copies of the Trust Deed and an agency agreement dated 19 May2015 (the ‘‘Agency Agreement’’) made between the Issuer, the Guarantor, Deutsche Bank AG, HongKong Branch as principal paying agent (the ‘‘Principal Paying Agent’’, and together with other payingagents appointed under the Agency Agreement, the ‘‘Paying Agents’’) and as transfer agent (the‘‘Transfer Agent’’) and Deutsche Bank Luxembourg S.A. as the registrar (the ‘‘Registrar’’, togetherwith the Transfer Agents and the Paying Agents, the ‘‘Agents’’), and the Trustee are available forinspection during normal business hours by the Bondholders at the principal office for the time being ofthe Trustee, being at the date of issue of the Bonds at Level 52, International Commerce Centre, 1Austin Road West, Kowloon, Hong Kong and at the specified office of the Principal Paying Agent. TheBondholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all theprovisions of the Trust Deed and those provisions of the Agency Agreement applicable to them.
The owners shown in the records of Euroclear Bank S.A./N.V. (‘‘Euroclear’’) and Clearstream Banking,société anonyme (‘‘Clearstream, Luxembourg’’) of book-entry interests in Bonds are entitled to thebenefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Deed andthose provisions of the Agency Agreement applicable to them.
1. FORM, DENOMINATION AND TITLE
1.1 Form and Denomination
The Bonds are issued in registered form in denominations of U.S.$200,000 and integralmultiples of U.S.$1,000 in excess thereof (referred to as the ‘‘Authorised Denomination’’ ofa Bond). A bond certificate (each a ‘‘Certificate’’) will be issued to each Bondholder inrespect of its registered holding of Bonds. Each Certificate will be numbered serially with anidentifying number which will be recorded on the relevant Certificate and in the register ofBondholders (the ‘‘Register’’) which the Issuer will procure to be kept by the Registrar andat the registered office of the Issuer.
Upon issue, the Bonds will be represented by a global certificate (the ‘‘Global Certificate’’)representing Bonds registered in the name of a nominee of, and deposited with, the commondepositary for Euroclear and Clearstream, Luxembourg. The Conditions are modified bycertain provisions contained in the Global Certificate. Except in the limited circumstancesdescribed in the Global Certificate, owners of interests in Bonds represented by the GlobalCertificate will not be entitled to receive definitive Certificates in respect of their individualholdings of Bonds.
1.2 Title
Title to the Bonds passes only by registration in the Register. The holder of any Bond will(except as otherwise required by law) be treated as its absolute owner for all purposes(whether or not it is overdue and regardless of any notice of ownership, trust or any interest
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or any writing on, or the theft or loss of, the Certificate issued in respect of it) and no personwill be liable for so treating the holder. In these Conditions, a ‘‘Bondholder’’ and (in relationto a Bond) ‘‘holder’’ means the person in whose name a Bond is registered in the Register.
2. TRANSFERS OF BONDS AND ISSUE OF CERTIFICATES
2.1 Transfers
Subject to paragraphs 2.4 and 2.5 below, a Bond may be transferred by depositing theCertificate issued in respect of that Bond, with the form of transfer on the back dulycompleted and signed, at the specified office of the Registrar or any of the Agents.
Transfers of interests in the Bonds evidenced by the Global Certificate will be effected inaccordance with the rules of the relevant clearing systems.
2.2 Delivery of new Certificates
Each new Certificate to be issued upon transfer of Bonds will, within five business days ofreceipt by the Registrar or the relevant Agent of the duly completed form of transferendorsed on the relevant Certificate, be mailed by uninsured mail at the risk of the holderentitled to the Bond to the address specified in the form of transfer. For the purposes of thisCondition 2.2, ‘‘business day’’ shall mean a day on which banks are generally open forbusiness in the city in which the specified office of the Agent with whom a Certificate isdeposited in connection with a transfer is located.
Except in the limited circumstances described herein (see ‘‘Summary of Provisions Relatingto the Bonds in Global Form’’ in this Offering Circular), owners of interests in the Bondswill not be entitled to receive physical delivery of the Certificates.
Where some but not all of the Bonds in respect of which a Certificate is issued are to betransferred, a new Certificate in respect of the Bonds not so transferred will, within fivebusiness days of receipt by the Registrar or the relevant Agent of the original Certificate, bemailed by uninsured mail at the risk of the holder of the Bonds not so transferred to theaddress of such holder appearing on the Register or as specified in the form of transfer.
2.3 Formalities free of charge
Registration of transfer of Bonds will be effected without charge by or on behalf of the Issueror any Agent but upon payment (or the giving of such indemnity and/or security as the Issueror any Agent may reasonably require) in respect of any tax or other governmental chargeswhich may be imposed in relation to such transfer.
2.4 Closed Periods
No Bondholder may require the transfer of a Bond to be registered (i) during the period of 15days ending on (and including) the due date for any payment of principal, premium orinterest on that Bond (ii) during the period of 15 days ending on (and including) any date onwhich Bonds may be called for redemption by the Issuer pursuant to Condition 8.2 or 8.4 and(iii) after a Put Exercise Notice has been delivered in respect of the relevant Bonds inaccordance with Condition 8.3.
2.5 Regulations
All transfers of Bonds and entries on the Register will be made subject to the detailedregulations concerning transfer of Bonds scheduled to the Trust Deed. The regulations maybe changed by the Issuer with the prior written approval of the Registrar and the Trustee. Acopy of the current regulations will be mailed (free of charge) by the Registrar to anyBondholder who requests one.
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3. STATUS OF THE BONDS
The Bonds are direct, unconditional, unsubordinated and (subject to the provisions of Condition 5)unsecured obligations of the Issuer and (subject as stated above) rank and will rank pari passu,without any preference among themselves, with all other outstanding unsecured andunsubordinated obligations of the Issuer, present and future, but, in the event of insolvency, onlyto the extent permitted by applicable laws relating to creditors’ rights.
4. GUARANTEE
4.1 Guarantee
The payment of the principal, premium and interest in respect of the Bonds and all othermoneys expressed to be payable by the Issuer under or pursuant to the Trust Deed has beenunconditionally and irrevocably guaranteed by the Guarantor (the ‘‘Guarantee’’) in the TrustDeed.
4.2 Status of the Guarantee
The obligations of the Guarantor under the Guarantee constitute direct, unconditional,unsubordinated and (subject to the provisions of Condition 5) unsecured obligations of theGuarantor and (subject as stated above) rank and will rank pari passu with all otheroutstanding unsecured and unsubordinated obligations of the Guarantor, present and future,but, in the event of insolvency, only to the extent permitted by applicable laws relating tocreditors’ rights.
5. COVENANTS
5.1 Negative Pledge
So long as any Bond remains outstanding (as defined in the Trust Deed), the Issuer and theGuarantor will not, and the Guarantor will procure that none of its Principal Subsidiarieswill, directly or indirectly, create, or have outstanding any mortgage, charge, pledge, lien orother form of encumbrance or security interest (each a ‘‘Security Interest’’) upon the wholeor any part of its present or future undertaking, assets or revenues (including any uncalledcapital) to secure any Relevant Indebtedness unless, at the same time or prior thereto, it takesany and all action necessary to ensure that (a) all amounts payable by it under the Bonds or,as the case may be, the Guarantee are secured by the Security Interest equally and rateablywith the Relevant Indebtedness or (b) such other Security Interest or other arrangement(whether or not it includes the giving of a Security Interest) is provided as is approved by anExtraordinary Resolution (as defined in the Trust Deed) of the Bondholders.
5.2 Provision of Financial Statements etc.
For so long as any of the Bonds remains outstanding, the Guarantor will furnish to theTrustee:
(a) a Compliance Certificate (on which the Trustee may rely as to such compliance) within30 days from request by the Trustee and at the time of the despatch to the Trustee ofthe Guarantor Audited Financial Reports;
(b) as soon as they are available, but in any event within 180 calendar days after the end ofeach Relevant Period, copies of the relevant Guarantor Audited Financial Reportsaudited by KPMG Huazhen (Special General Partnership) or another internationallyrecognised firm of independent accountants; and
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(c) as soon as they are available, but in any event within 120 calendar days after the end ofeach Relevant Period, copies of the relevant Guarantor Unaudited ManagementAccounts,
provided that if such financial statements shall be in the Chinese language, together with anEnglish translation of the same translated by (A) KPMG Huazhen (Special GeneralPartnership) or another internationally recognised firm of independent accountants or (B) aprofessional translation service provider, provided further that if at any time the ordinaryshares of the Guarantor are listed for trading on a recognised stock exchange, the Guarantorshall make available to the Trustee, as soon as they are available but in any event not morethan 14 days after any financial or other reports of the Guarantor are filed with the exchangeon which the Guarantor’s ordinary shares is at such time listed for trading, true and correctcopies of any financial or other report filed with such exchange in lieu of the statements andthe reports identified in this Condition 5.2.
5.3 Undertakings relating to the Guarantee
The Guarantor undertakes that it will (a) register or cause to be registered with SAFE, theGuarantee in accordance with, and within the time period prescribed by, the ForeignExchange Administration Rules on Cross‑border Security(跨境擔保外匯管理規定)(the‘‘Cross‑border Security Registration’’), (b) use all reasonable endeavours to complete theCross‑border Security Registration and obtain a registration record from SAFE (or any otherdocument evidencing the completion of registration issued by SAFE) on or before theRegistration Deadline and (c) comply with all applicable PRC laws and regulations inrelation to the Guarantee.
5.4 Interpretation
For the purposes of these Conditions (unless otherwise defined):
‘‘Compliance Certificate’’ means a certificate signed by an authorised signatory of theGuarantor to effect that, having made all due and careful enquiries, to the best of theknowledge, information and belief of the Guarantor, as at a date not more than seven daysbefore delivering such certificate (the ‘‘Certification Date’’) there did not exist and had notexisted since the Certification Date of the previous certificate any Event of Default providedfor in Condition 11.1 or any condition, event or act which, with the lapse of time and/or theissue, making or giving of any notice, certification, declaration, demand, determination and/or request and/or the taking of any similar action and/or the fulfilment of any similarcondition, would constitute an Event of Default (or if such exists or existed specifying thesame) and that during the period from and including the Certification Date of the last suchcertificate to and including the Certification Date of such certificate each of the Issuer andthe Guarantor has complied with all its obligations contained in the Trust Deed or (if such isnot the case) specifying the respects in which it has not complied;
‘‘control’’ (including the terms controlling, controlled by and under common control with)means the possession, direct or indirect, of the power to direct or cause the direction of themanagement and policies of a Person, whether through the ownership of voting securities, bycontract or otherwise;
‘‘guarantee’’ means, in respect of any indebtedness or obligation of any Person, anyguarantee, indemnity and/or similar assurance against loss provided by another Person inrespect of such indebtedness or obligation;
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‘‘Guarantor Audited Financial Reports’’ means the annual audited consolidated statementof income, consolidated balance sheet, consolidated statement of changes in equity andconsolidated statement of cash flows together with any statements, reports (including anydirectors’ and auditors’ reports) and notes attached to or intended to be read with any ofthem;
‘‘Guarantor Unaudited Management Accounts’’ means the interim unaudited andunreviewed management accounts comprising the consolidated statement of income,consolidated balance sheet and consolidated statement of cash flows;
‘‘Hong Kong’’ means the Hong Kong Special Administrative Region of the PRC;
‘‘Person’’ means any individual, corporation, partnership, limited liability company, jointventure, trust, unincorporated organisation or government or any agency or politicalsubdivision thereof;
‘‘Principal Subsidiary’’ means any Subsidiary of the Guarantor:
(a) whose gross revenues (consolidated in the case of a Subsidiary which has Subsidiaries)attributable to the Guarantor, as shown by its latest audited income statement are atleast 10 per cent. of the consolidated gross revenues of the Guarantor and itsconsolidated Subsidiaries as shown by the latest published audited income statement ofthe Guarantor and its consolidated Subsidiaries; or
(b) whose gross assets (consolidated in the case of a Subsidiary which itself hasSubsidiaries) attributable to the Guarantor, as shown by its latest audited balance sheet,are at least 10 per cent. of the consolidated gross assets of the Guarantor and itsconsolidated Subsidiaries as shown by the latest published audited consolidated balancesheet of the Guarantor and its consolidated Subsidiaries, including the investment of theGuarantor and its consolidated Subsidiaries in each Subsidiary whose accounts are notconsolidated with the consolidated audited accounts of the Guarantor and of associatedcompanies and after adjustment for minority interests,
provided that, in relation to paragraphs (a) and (b) above:
(i) in the case of a corporation or other business entity becoming a Subsidiary afterthe end of the financial period to which the latest consolidated audited accounts ofthe Guarantor relate, the reference to the then latest consolidated audited accountsof the Guarantor and its Subsidiaries for the purposes of the calculation aboveshall, until consolidated audited accounts of the Guarantor for the financial periodin which the relevant corporation or other business entity becomes a Subsidiaryare published be deemed to be a reference to the then latest consolidated auditedaccounts of the Guarantor and its Subsidiaries adjusted to consolidate the latestaudited accounts (consolidated in the case of a Subsidiary which itself hasSubsidiaries) of such Subsidiary in such accounts;
(ii) if at any relevant time in relation to the Guarantor or any Subsidiary which itselfhas Subsidiaries no consolidated accounts are prepared and audited, grossrevenues or gross assets of the Guarantor and/or any such Subsidiary shall bedetermined on the basis of pro forma consolidated accounts prepared for thispurpose by the Guarantor for the purposes of preparing a certificate thereon to theTrustee;
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(iii) if at any relevant time in relation to any Subsidiary, no accounts are audited, itsgross assets (consolidated, if appropriate) shall be determined on the basis of proforma accounts (consolidated, if appropriate) of the relevant Subsidiary preparedfor this purpose by the Guarantor for the purposes of preparing a certificatethereon to the Trustee; and
(iv) if the accounts of any Subsidiary (not being a Subsidiary referred to in proviso (i)above) are not consolidated with those of the Guarantor, then the determination ofwhether or not such Subsidiary is a Principal Subsidiary shall be based on a proforma consolidation of its accounts (consolidated, if appropriate) with theconsolidated accounts (determined on the basis of the foregoing) of theGuarantor, or
(c) to which is transferred the whole or substantially the whole of the assets of a Subsidiarywhich immediately prior to such transfer was a Principal Subsidiary, provided that thePrincipal Subsidiary which so transfers its assets shall forthwith upon such transfercease to be a Principal Subsidiary and the Subsidiary to which the assets are sotransferred shall cease to become a Principal Subsidiary at the date on which the firstpublished audited accounts (consolidated, if appropriate) of the Guarantor prepared asof a date later than such transfer are issued unless such Subsidiary would continue to bea Principal Subsidiary on the basis of such accounts by virtue of the provisions ofparagraph (a) or (b) above;
‘‘PRC’’ means the People’s Republic of China which, for the purpose of these Conditions,shall exclude Hong Kong, the Macau Special Administrative Region of the People’s Republicof China and Taiwan;
‘‘Registration Deadline’’ means the day falling 90 days after the Issue Date;
‘‘Relevant Indebtedness’’ means (a) any present or future indebtedness (whether beingprincipal, premium, interest or other amounts) for or in respect of notes, bonds, debentures,debenture stock, loan stock, certificates of deposit or other securities which for the timebeing are, or are intended to be or capable of being, quoted, listed or dealt in or traded onany stock exchange or over-the-counter or other securities market and (b) any guarantee (asdefined in this Condition 5.4) of any such indebtedness; which, for the avoidance of doubt,shall exclude securities where payments made under such securities are serviced primarily bythe cash flows of receivables and which are commonly regarded as asset-backed securities;
‘‘Relevant Period’’ means (a) in relation to the Guarantor Audited Financial Reports, eachperiod of twelve months ending on the last day of its financial year (currently being 31December of that financial year) and (b) in relation to the Guarantor Unaudited ManagementAccounts, each period of six months ending on the last day of its first half financial year(currently being 30 June of that financial year);
‘‘SAFE’’ means the State Administration of Foreign Exchange of the PRC or its localcounterpart; and
‘‘Subsidiary’’ means, in relation to any Person, means, any company (a) in which that Personowns or controls (either directly or through one or more other Subsidiaries) more than 50 percent. of the issued share capital or other ownership interest having ordinary voting power toelect directors, managers or trustees of such company or (b) which at any time has itsaccounts consolidated with those of that Person or which, under the law, regulations orgenerally accepted accounting principles of the jurisdiction of incorporation of such Personfrom time to time, should have its accounts consolidated with those of that Person.
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6. INTEREST
6.1 Interest Rate and Interest Payment Dates
The Bonds bear interest on their outstanding principal amount from and including 19 May2015 at the rate of 4.125 per cent. per annum, (the ‘‘Rate of Interest’’) payable semi-annually in arrear in equal instalments on 19 May and 19 November in each year (each an‘‘Interest Payment Date’’). The first payment (representing a full six months’ interest) (forthe period from and including 19 May 2015 to but excluding 19 November 2015) shall bemade on 19 November 2015.
6.2 Interest Accrual
Each Bond will cease to bear interest from and including its due date for redemption unless,upon due presentation or surrender, payment of principal or premium in respect of the Bondis improperly withheld or refused or unless default is otherwise made in respect of paymentin which event interest will continue to accrue (both before and after any judgment) at therate aforesaid from and including the date of such withholding, refusal or default up to andincluding the date on which (upon further presentation of the relevant Bond, if required)payment of the full amount (including interest as aforesaid) payable in respect of such Bondis made or (in respect of the payment of the principal amount and if earlier) the seventh dayafter notice is given to the relevant Bondholder (either individually or in accordance withCondition 14) that the full amount (including interest as aforesaid) payable in respect of suchBond is available for payment, provided that, upon further presentation thereof being dulymade, such payment is made.
6.3 Calculation of Interest
The amount of interest payable on each Interest Payment Date shall be U.S.$4,125 in respectof each Bond of U.S.$200,000 denomination and U.S.$20.63 in respect of each U.S.$1,000principal amount of the Bonds. If interest is required to be paid in respect of a Bond on anyother date, it shall be calculated by applying the Rate of Interest to the Calculation Amount,multiplying the product by the relevant Day Count Fraction, rounding the resulting figure tothe nearest cent (half a cent being rounded upwards) and multiplying such rounded figure bya fraction equal to the Authorised Denomination of such Bond divided by the CalculationAmount, where ‘‘Calculation Amount’’ means U.S.$1,000 and ‘‘Day Count Fraction’’means, in respect of any period, the number of days in the relevant period divided by 360(the number of days to be calculated on the basis of a year of 360 days with 12 30-daymonths).
7. PAYMENTS
7.1 Method of payment
Payment of principal, premium (if any) and interest due on the Bonds will be made bytransfer to the registered account of the Bondholder or by U.S. dollar cheque drawn on abank that process payments in U.S. dollars mail to the registered address of the Bondholder ifit does not have a registered account. Payment of principal, premium (if any) and paymentsof interest due otherwise than on an Interest Payment Date will only be made againstsurrender of the relevant Certificate at the specified office of any Agent. Interest on Bondsdue on an Interest Payment Date will be paid on the due date for the payment of interest tothe holder shown on the Register at the close of business on the fifth Payment Business Day(as defined in Condition 7.6) before the payment of interest (the ‘‘Interest Record Date’’).Payment of all other amounts will be made as provided in these Conditions.
If an amount which is due on the Bonds is not paid in full, the Registrar will annotate theRegister with a record of the amount (if any) in fact paid.
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Notwithstanding the foregoing, so long as the Global Certificate is held on behalf ofEuroclear, Clearstream or any other clearing system, each payment in respect of the GlobalCertificate will be made to the person shown as the holder in the Register at the close ofbusiness of the relevant clearing system on the Clearing System Business Day before the duedate for such payments, where ‘‘Clearing System Business Day’’ means a weekday (Mondayto Friday, inclusive) except 25 December and 1 January.
7.2 Registered accounts
For the purposes of this Condition 7, a Bondholder’s ‘‘registered account’’ means the U.S.dollar account maintained by or on behalf of it with a bank that processes payments in U.S.dollars, details of which appear on the Register at the close of business on the fifth PaymentBusiness Day before the due date for payment.
7.3 Payment initiation
Where payment is to be made by transfer to a registered account, payment instructions (forvalue on the due date or, if that is not a Payment Business Day, for value on the firstfollowing day which is a Payment Business Day) will be initiated and, where payment is tobe made by cheque, the cheque will be mailed, on the due date for payment (or, if it is not aPayment Business Day, the immediately following Payment Business Day) or, in the case ofa payment of principal or premium (if any) or a payment of interest due otherwise than on anInterest Payment Date, if later, on the Payment Business Day on which the relevantCertificate is surrendered at the specified office of an Agent.
7.4 Payments subject to fiscal laws
All payments are subject in all cases to (i) any applicable fiscal or other laws and regulationsin the place of payment, but without prejudice to the provisions of Condition 9 and (ii) anywithholding or deduction required pursuant to an agreement described in Section 1471(b) ofthe U.S. Internal Revenue Code of 1986 (the ‘‘Code’’) or otherwise imposed pursuant toSections 1471 through 1474 of the Code, any regulations or agreements thereunder, anyofficial interpretations thereof, or (without prejudice to the provisions of Condition 9) anylaw implementing an intergovernmental approach thereto. No commissions or expenses willbe charged to the Bondholders in respect of such payments.
7.5 Delay in payment
Bondholders will not be entitled to any interest or other payment for any delay after the duedate in receiving the amount due if the due date is not a Payment Business Day or if theBondholder is late in surrendering its Certificate (if required to do so) or if a cheque mailedin accordance with this Condition 7 arrives after the due date for payment.
7.6 Payment Business Day
In this Condition 7 ‘‘Payment Business Day’’ means a day (other than a Saturday or Sunday)on which commercial banks are generally open for business in Hong Kong and New YorkCity and, in the case of the surrender of a Certificate, in the place where the relevantCertificate is surrendered.
7.7 Agents
The initial Agents and their initial specified offices are listed below. The Issuer and theGuarantor reserve the right, subject to the prior written approval of the Trustee, at any timeto vary or terminate the appointment of any Agent and appoint additional or other Agents,provided that it will at all times maintain (a) a Principal Paying Agent, (b) a Registrar whowill maintain the Register outside of the United Kingdom in all circumstances and (c) as
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necessary, a Paying Agent in a Member State of the European Union that is not obliged towithhold or deduct tax pursuant to European Council Directive 2003/48/EC or any lawimplementing or complying with, or introduced in order to conform to, such Directive.
8. REDEMPTION AND PURCHASE
8.1 Redemption at Maturity
Unless previously redeemed or purchased and cancelled as provided below, the Issuer willredeem the Bonds at their principal amount on 19 May 2025 (the ‘‘Maturity Date’’), subjectas provided in Condition 7 (Payments).
8.2 Redemption for Taxation Reasons
If the Issuer satisfies the Trustee immediately before the giving of the notice referred tobelow in this Condition 8.2 that:
(a) as a result of any change in, or amendment to, the laws or regulations of a RelevantJurisdiction (as defined in Condition 9), or any change in, or amendment to, theapplication or official interpretation of the laws or regulations of a RelevantJurisdiction, which change or amendment becomes effective on or after 12 May 2015either (i) the Issuer would be required to pay additional amounts as provided or referredto in Condition 9 or (ii) the Guarantor would be unable for reasons outside its controlto procure payment by the Issuer and in making payment itself would be required topay such additional amounts; and
(b) the requirement cannot be avoided by the Issuer or, as the case may be, the Guarantortaking reasonable measures available to it,
the Issuer may at its option, having given not less than 30 nor more than 60 days’ notice tothe Bondholders in accordance with Condition 14 (which notice shall be irrevocable), redeemall the Bonds, but not some only, at any time at their principal amount and premium (if any)together with accrued interest, provided that no such notice of redemption shall be givenearlier than 90 days prior to the earliest date on which the Issuer or, as the case may be, theGuarantor would be obliged to pay such additional amounts, were a payment in respect of theBonds then due. Prior to the publication of any notice of redemption pursuant to thisCondition 8.2, the Issuer shall deliver to the Trustee (i) a certificate signed by any authorisedrepresentative of the Issuer or, as the case may be, the Guarantor stating that the requirementreferred to in (a) above will apply and cannot be avoided by the Issuer or, as the case maybe, the Guarantor taking reasonable measures available to it and (ii) an opinion ofindependent legal or tax advisers of recognised standing to the effect that the Issuer or, as thecase may be, the Guarantor has or will become obliged to pay such additional amounts as aresult of such change or amendment, and the Trustee shall be entitled to accept the certificateand opinion as sufficient evidence of the satisfaction of the conditions precedent set outabove in this Condition 8.2, in which event they shall be conclusive and binding on theBondholders.
8.3 Redemption upon Relevant Event
Following the occurrence of a Relevant Event (as defined below in this Condition 8.3), theholder of each Bond will have the right (the ‘‘Relevant Event Put Right’’), at such holder’soption, to require the Issuer to redeem all, or some only, of that holder’s Bonds on the PutSettlement Date (as defined below in this Condition 8.3) at 101 per cent. (in the case of aredemption for a Change of Control, as defined below in this Condition 8.3) or 100 per cent.(in the case of a redemption for a No Registration Event, as defined below in this Condition8.3) of their principal amount together, in each case, with accrued interest to the Put
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Settlement Date. To exercise such right, the holder of the relevant Bond must complete, signand deposit at the specified office of any Paying Agent a duly completed and signed noticeof redemption, in the form for the time being current, obtainable from the specified office ofany Paying Agent (the ‘‘Put Exercise Notice’’) together with the Certificate evidencing theBonds to be redeemed by not later than 30 days following a Relevant Event, or, if later, 30days following the date upon which notice thereof is given to Bondholders by the Issuer orthe Guarantor in accordance with Condition 14.
The ‘‘Put Settlement Date’’ shall be the fourteenth day (in the case of a redemption for aChange of Control) or the fifth day (in the case of a redemption for a No Registration Event)after the expiry of such period of 30 days after the later of a Relevant Event or the date uponwhich notice of a Relevant Event is given to Bondholders by the Issuer or the Guarantor inaccordance with Condition 14 as referred to above.
A Put Exercise Notice, once delivered, shall be irrevocable and the Issuer shall redeem theBonds that are the subject of Put Exercise Notices delivered as aforesaid on the PutSettlement Date.
The Issuer, failing whom the Guarantor, shall give notice to the Bondholders and the Trusteein accordance with Condition 14 by not later than 14 days (in the case of a Change ofControl) or five days (in the case of a No Registration Event) following the first day onwhich it becomes aware of the occurrence of a Relevant Event, which notice shall specify theprocedure for exercise by holders of their rights to require redemption of the Bonds pursuantto this Condition 8.3 and shall give brief details of the Relevant Event. Neither the Trusteenor any of the Agents shall be required to take any steps to ascertain whether a RelevantEvent or any event which could lead to the occurrence of a Relevant Event has occurred andshall be entitled to rely conclusively upon any notice of Relevant Event provided by theIssuer or the Guarantor in accordance with this Condition 8.3.
Within 10 days after satisfaction of the Registration Conditions, the Issuer shall providenotices thereof to Bondholders.
For the purposes of this Condition 8.3:
‘‘Control’’ means (i) the ownership or control of more than 50 per cent. of the voting rightsof the issued share capital of the Guarantor or (ii) the right to appoint and/or remove themajority of the members of the Guarantor’s board of directors or other governing body,whether obtained directly or indirectly, and whether obtained by ownership of share capital,the possession of voting rights, contract or otherwise;
a ‘‘Change of Control’’ occurs when:
(a) the Huawei Union ceases to Control the Guarantor; or
(b) the Guarantor consolidates with or merges into or sells or transfers all or substantiallyall of the Guarantor’s assets to any other Person, unless the consolidation, merger, saleor transfer will not result in the other Person or Persons acquiring Control over theGuarantor or the successor entity;
‘‘Huawei Union’’ means the Union of Huawei Investment & Holding Co., Ltd, which hasbeen awarded the legal person status of a social group pursuant to the General Principles ofCivil Law and Trade Union Law of the PRC;
a ‘‘No Registration Event’’ occurs when the Registration Conditions are not satisfied on orbefore the Registration Deadline (as defined in Condition 5.4);
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‘‘Person’’ includes any individual, company, corporation, firm, partnership, joint venture,undertaking, association, organisation, trust, state or agency of a state (in each case whetheror not being a separate legal entity) but does not include the Guarantor’s board of directors orany other governing board and does not include the Guarantor’s wholly-owned direct orindirect subsidiaries;
‘‘Registration Conditions’’ means the receipt by the Trustee of: (i) a certificate signed byany director or authorised officer of the Guarantor confirming the completion of theregistration of the Guarantee with SAFE in accordance with the Foreign ExchangeAdministration Rules on Cross-border Security(跨境擔保外匯管理規定)and (ii) a copy ofthe relevant SAFE registration certificate relating to such registration with SAFE in (i) aboveof this definition; and
‘‘Relevant Event’’ will be deemed to occur if:
(a) there is a Change of Control; or
(b) there is a No Registration Event.
8.4 Redemption at the option of the Issuer
The Bonds may be redeemed at the option of the Issuer in whole or in part at any time at aprice equal to their Make Whole Amount together with interest accrued but unpaid to the datefixed for redemption (collectively, the ‘‘Make Whole Redemption Price’’), on the Issuer’sgiving not less than 30 nor more than 60 days’ notice to the Bondholders (which notice shallbe irrevocable and shall oblige the Issuer to redeem the relevant Bonds on the relevant datefixed for redemption at the Make Whole Redemption Price) (a ‘‘Make Whole RedemptionNotice’’).
For the purposes of this Condition 8.4:
‘‘Comparable Treasury Issue’’ means the United States Treasury security selected by theIndependent Investment Bank as having a maturity comparable to the remaining term of theBonds from the relevant date fixed for redemption to the Maturity Date, that would beutilised, at the time of selection and in accordance with customary financial practice, inpricing new issues of corporate debt securities of a maturity most nearly equal to theMaturity Date;
‘‘Comparable Treasury Price’’ means, with respect to any redemption date for the Bonds,the average of three, or such lesser number as is obtained by the Independent InvestmentBank, Reference Treasury Dealer Quotations for such redemption date of the Bonds;
‘‘Independent Investment Bank’’ means an independent investment bank of internationalrepute, appointed by the Issuer (and notice thereof is given to the Trustee in writing and toBondholders by the Issuer in accordance with Condition 14 (Notices)) for the purposes ofperforming any of the functions expressed to be performed by it under these Conditions;
‘‘Make Whole Amount’’ means, in respect of each Bond at the relevant date fixed forredemption, (i) the principal amount of such Bond or, if this is higher (ii) the amount equalto the sum of the present value of the principal amount of such Bond, together with thepresent values of the interest payable in the relevant interest periods from the relevantredemption date to the Maturity Date, in each case, discounted to such redemption date on asemi-annual compounded basis at the U.S. Treasury Rate plus 0.50 per cent., all asdetermined by the Independent Investment Bank;
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‘‘Make Whole Determination Business Day’’ means a day, other than a Saturday, Sundayor public holiday, on which commercial banks and foreign exchange markets are open forgeneral business in Hong Kong and New York City;
‘‘Reference Treasury Dealer’’ means each of the three nationally recognised investmentbanking firms selected by the Independent Investment Bank that are primary U.S.Government securities dealers;
‘‘Reference Treasury Dealer Quotations’’ means, with respect to each Reference TreasuryDealer and any redemption date for the Bonds, the average, as determined by the IndependentInvestment Bank, of the bid and asked prices for the Comparable Treasury Issue, expressedin each case as a percentage of its principal amount, quoted in writing to the IndependentInvestment Bank by such Reference Treasury Dealer at 5:00 p.m., New York City time onthe third Make Whole Determination Business Day immediately preceding the issue of theMake Whole Redemption Notice; and
‘‘U.S. Treasury Rate’’ means either (i) the rate per annum equal to the yield, under theheading that represents the average for the week immediately preceding the third MakeWhole Determination Business Day prior to the issue of the Make Whole Redemption Notice,appearing in the most recently published statistical release designated ‘‘H.15(519)’’ or if suchrelease is not published any successor publication that is published weekly by the Board ofGovernors of the Federal Reserve System and that establishes yields on actively tradedUnited States Treasury securities adjusted to constant maturity under the caption ‘‘TreasuryConstant Maturities’’ for the maturity corresponding to the Comparable Treasury Issue (if nomaturity is within three months before or after the Maturity Date, yields for the twopublished maturities most closely corresponding to the Comparable Treasury Issue shall bedetermined and the U.S. Treasury Rate shall be interpolated or extrapolated from such yieldson a straight line basis, rounding to the nearest month) or (ii) if such release (or anysuccessor release) is not published during the week preceding the third Make WholeDetermination Business Day prior to the issue of the Make Whole Redemption Notice ordoes not contain such yields, the rate per annum equal to the semi-annual equivalent yield tomaturity of the Comparable Treasury Issue (expressed as a percentage of its principalamount) equal to the Comparable Treasury Price for such redemption date, in each casecalculated on the third Make Whole Determination Business Day immediately preceding theissue of the Make Whole Redemption Notice.
8.5 Purchases
The Issuer, the Guarantor or any of the Guarantor’s other Subsidiaries (as defined above inCondition 5.4) may at any time purchase Bonds in any manner and at any price.
8.6 Cancellations
All Bonds which are (a) redeemed or (b) purchased by or on behalf of the Issuer, theGuarantor or any of the Guarantor’s other Subsidiaries will forthwith be cancelled, andaccordingly may not be held, reissued or resold.
8.7 Notices Final
Upon the expiry of any notice as is referred to in Conditions 8.2, 8.3 and 8.4, the Issuer shallbe bound to redeem the Bonds to which the notice refers in accordance with the terms ofsuch Condition.
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9. TAXATION
As of the date of this Offering Circular, payments of premium (if any) and interest on the Bonds bythe Guarantor under the Guarantee are subject to a withholding tax at a rate up to 10 per cent. inthe PRC, in respect of which the Guarantor will pay additional amounts so that after deducting orwithholding such taxes, Bondholders will receive the amounts of premium (if any) and interestwhich would otherwise have been received in the absence of such deduction or withholding. TheGuarantor will account directly to the PRC authorities with respect to such taxes. See ‘‘Taxation –
PRC Taxation’’. Bondholders are advised to consult local tax counsel with regard to the taxconsequences of their holdings in the Bonds.
9.1 Payment without Withholding
All payments in respect of the Bonds by or on behalf of the Issuer or the Guarantor shall bemade free and clear of, and without withholding or deduction for, or on account of, anypresent or future taxes, duties, assessments or governmental charges of whatever nature(‘‘Taxes’’) imposed or levied by or on behalf of any of the Relevant Jurisdictions, unless thewithholding or deduction of the Taxes is required by law. In that event, the Issuer or, as thecase may be, the Guarantor will pay such additional amounts as may be necessary in orderthat the net amounts received by the Bondholders after the withholding or deduction shallequal the respective amounts which would have been receivable in respect of the Bonds inthe absence of the withholding or deduction; except that no additional amounts shall bepayable in relation to any payment in respect of any Bond:
(a) presented for payment by or on behalf of a holder who is liable to the Taxes in respectof the Bond by reason of his having some connection with any Relevant Jurisdictionother than the mere holding of the Bond; or
(b) where such withholding or deduction is imposed on a payment to an individual and isrequired to be made pursuant to European Council Directive 2003/48/EC or any lawimplementing or complying with, or introduced in order to conform to, such Directive;or
(c) if the Certificate in respect of such Bond is presented for payment by or on behalf of aholder who would have been able to avoid such withholding or deduction by presentingthe relevant Bond to another Paying Agent in a Member State of the European Union;or
(d) if the Certificate in respect of such Bond is presented for payment more than 30 daysafter the Relevant Date (as defined below) except to the extent that a holder would havebeen entitled to additional amounts on presenting the same for payment on the last dayof the period of 30 days assuming (whether or not such is in fact the case) that day tohave been a Payment Business Day (as defined in Condition 7).
9.2 Interpretation
In these Conditions:
(a) ‘‘Relevant Date’’ means the date on which the payment first becomes due but, if thefull amount of the money payable has not been received by an Agent or the Trustee onor before the due date, it means the date on which, the full amount of the money havingbeen so received, notice to that effect has been duly given to the Bondholders by theIssuer in accordance with Condition 14; and
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(b) ‘‘Relevant Jurisdiction’’ means the British Virgin Islands or the PRC or any politicalsubdivision or any authority therein or thereof having power to tax to which the Issueror the Guarantor becomes subject in respect of payments made by it of principal,premium and interest on the Bonds.
9.3 Additional Amounts
(a) Any reference in these Conditions to any amounts in respect of the Bonds shall bedeemed to refer to any additional amounts which may be payable under this Condition9 or under any undertakings given in addition to, or in substitution for, this Condition 9pursuant to the Trust Deed provided that the additional amounts provided or referredto in this Condition 9 which are to be paid as a result of withholding or deduction inrespect of PRC enterprise income tax at a rate of up to 10 per cent. in respect ofpayments of premium (if any) and interest on the Bonds by the Guarantor under theGuarantee shall not constitute additional amounts for the purposes of Condition 8.2.
(b) If the Issuer or the Guarantor becomes subject at any time to any taxing jurisdictionother than any of the Relevant Jurisdictions, references in these Conditions to theRelevant Jurisdiction shall be construed as references to such other jurisdiction.
10. PRESCRIPTION
Claims in respect of principal, premium and interest will become prescribed unless made within 10years (in the case of principal and premium) and five years (in the case of interest) from theRelevant Date, as defined in Condition 9.
11. EVENTS OF DEFAULT
11.1 Events of Default
The Trustee at its discretion may, and if so requested in writing by the holders of at leastone-quarter in principal amount of the Bonds then outstanding or if so directed by anExtraordinary Resolution of the Bondholders shall (subject in each case to being indemnifiedand/or secured and/or pre-funded to its satisfaction) give notice to the Issuer and theGuarantor that the Bonds are, and they shall accordingly forthwith become, immediately dueand repayable at their principal amount, together with accrued interest as provided in theTrust Deed, in any of the following events (‘‘Events of Default’’):
(a) if default is made in the payment of any principal or premium due in respect of theBonds and the default continues for a period of three Business Days or if default ismade in the payment of any interest due in respect of the Bonds and the defaultcontinues for a period of 14 days; or
(b) if the Issuer or the Guarantor fails to perform or observe any of its other obligationsunder these Conditions or the Trust Deed (other than those the breach of which wouldgive rise to a redemption pursuant to Condition 8.3 (Redemption upon Relevant Event)and (except in any case where the Trustee considers the failure to be incapable ofremedy, when no continuation or notice as is hereinafter mentioned will be required)the failure continues for the period of 30 days (or such longer period as the Trusteemay permit) following the service by the Trustee on the Issuer or the Guarantor (as thecase may be) of notice requiring the same to be remedied; or
(c) (i) if the principal of any Indebtedness for Borrowed Money (as defined below) of theIssuer, the Guarantor or any of the Guarantor’s Subsidiaries is not paid upon finalmaturity (after giving effect to the expiration of any applicable grace period therefor);(ii) the acceleration of the maturity of any Indebtedness for Borrowed Money of the
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Issuer, the Guarantor or any of the Guarantor’s Subsidiaries by reason of an event ofdefault (however described); (iii) the failure to pay any amount payable by the Issuer,the Guarantor or any of the Guarantor’s Subsidiaries under any guarantee (as defined inCondition 5.4) given by it in relation to any Indebtedness for Borrowed Money of anyother person; provided that no event described in this subparagraph 11.1(c) shallconstitute an Event of Default unless the Indebtedness for Borrowed Money or otherrelative liability due and unpaid, either alone or when aggregated (without duplication)with other amounts of Indebtedness for Borrowed Money and/or other liabilities dueand unpaid relative to all (if any) other events specified in (i) through (iii) inclusiveabove which have occurred and are continuing, amounts to at least U.S.$100,000,000(or the equivalent thereof in any other currency); or
(d) if any order is made by any competent court (from which no further appeal or judicialreview is permissible under the applicable law) or resolution is passed for the windingup or dissolution of the Issuer, the Guarantor or any of the Guarantor’s PrincipalSubsidiaries, save that (i) a reorganisation, amalgamation, consolidation or merger of aGuarantor’s Principal Subsidiary whereby all or substantially all the assets orundertaking of such Principal Subsidiary are transferred or continue to be otherwisevested in the Issuer, the Guarantor or other Subsidiaries (the ‘‘Reorganisation’’) in anycombination or (ii) a solvent voluntary winding up or dissolution of a Guarantor’sPrincipal Subsidiary, shall not constitute an Event of Default; or
(e) if the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries ceases tocarry on the whole or a substantial part of its business save for the purposes of,pursuant to or followed by a Reorganisation of a Guarantor’s Principal Subsidiary or theIssuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries stops payment of,or is unable to pay, all or a material part of its Indebtedness for Borrowed Money asthey fall due, or is adjudicated or found bankrupt or insolvent; or
(f) if (i) proceedings are initiated against the Issuer, the Guarantor or any of theGuarantor’s Principal Subsidiaries under any applicable liquidation, insolvency,composition, reorganisation or other similar laws or an administrative or other receiver,manager, administrator or other similar official is appointed, in relation to the Issuer,the Guarantor or any of the Guarantor’s Principal Subsidiaries, in each case, in relationto the whole or a material part of the undertaking or assets of any of them and save forthe purposes of, pursuant to or followed by a Reorganisation of a Guarantor’s PrincipalSubsidiary or, an encumbrancer takes possession of the whole or a material part of theundertaking or assets of any of them, or a distress, execution, attachment, sequestrationor other process is levied, enforced upon, sued out or put in force against the whole ora material part of the undertaking or assets of any of them, and (ii) in any such case(other than the appointment of an administrator) not discharged within 60 days; or
(g) if the Guarantee ceases to be, or is claimed by the Guarantor not to be, in full force andeffect; or
(h) if the Issuer ceases to be a subsidiary wholly-owned and controlled, directly orindirectly, by the Guarantor; or
(i) if the Bonds, the Guarantee or the Trust Deed is or becomes unenforceable or invalid;or
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(j) if any regulation, decree, consent, approval, licence or other authority necessary toenable the Issuer or the Guarantor to perform its obligations under the Bonds, theGuarantee or the Trust Deed or for the validity or enforceability thereof expires or iswithheld, revoked or terminated or otherwise ceases to remain in full force and effect oris modified; or
(k) if any event occurs which, under the laws of any relevant jurisdiction, has or may have,in the Trustee’s opinion, an analogous effect to any of the events referred to insubparagraphs (d) to (j) above.
Notwithstanding the issue of the notice to the Issuer and the Guarantor that the Bonds areimmediately due and repayable at their principal amount together with accrued interest (the‘‘Acceleration Notice’’) but before a judgment or decree for payment of money has beenobtained by the Trustee, the Bondholders holding a majority of the Bonds then outstanding,may waive all past defaults and rescind and annul such Acceleration Notice on the terms assuch holders deem fit.
11.2 Interpretation
For the purposes of this Condition 11:
‘‘Business Day’’ means a day (other than a Saturday or Sunday) on which commercial banksare generally open for business in Hong Kong and the PRC; and
‘‘Indebtedness for Borrowed Money’’ means any indebtedness (whether being principal,premium, interest or other amounts) for or in respect of any notes, bonds, debentures,debenture stock, loan stock or other securities or any borrowed money or any liability underor in respect of any acceptance or acceptance credit.
12. ENFORCEMENT
12.1 The Trustee may at any time, at its discretion and without notice, take such proceedings and/or other steps or action (including lodging an appeal in any proceedings) against or inrelation to the Issuer and/or the Guarantor as it may think fit to enforce the provisions of theTrust Deed and the Bonds, but it shall not be bound to take any such proceedings or anyother steps or action in relation to the Trust Deed or the Bonds unless (a) it shall have beenso directed by an Extraordinary Resolution of the Bondholders or so requested in writing bythe holders of at least one-quarter in principal amount of the Bonds then outstanding, and (b)it has been indemnified and/or secured and/or pre-funded to its satisfaction.
12.2 The Trustee may refrain from taking any action in any jurisdiction if the taking of suchaction in that jurisdiction would, in its opinion based upon legal advice in the relevantjurisdiction, be contrary to any law or regulation of that jurisdiction. Furthermore, the Trusteemay also refrain from taking such action if it would otherwise render it liable to any personin that jurisdiction or if, in its opinion based upon such legal advice, it would not have thepower to do the relevant thing in that jurisdiction by virtue of any applicable law orregulation in that jurisdiction or if it is determined by any court or other competent authorityin that jurisdiction that it does not have such power.
12.3 No Bondholder shall be entitled to (a) take any steps or action against the Issuer or theGuarantor to enforce the performance of any of the provisions of the Trust Deed or theBonds or (b) take any other proceedings (including lodging an appeal in any proceedings) inrespect of or concerning the Issuer or the Guarantor, in each case unless the Trustee, havingbecome bound so to take any such action, steps or proceedings, fails so to do within areasonable period and the failure shall be continuing.
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13. REPLACEMENT OF CERTIFICATES
If any Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the specifiedoffice of the Registrar upon payment by the claimant of the expenses incurred in connection withthe replacement and on such terms as to evidence and indemnity as the Issuer and the Registrarmay reasonably require. Mutilated or defaced Certificates must be surrendered before replacementswill be issued.
14. NOTICES
All notices to the Bondholders will be valid if mailed to them at their respective addresses in theRegister maintained by the Registrar or published in a leading newspaper having generalcirculation in Asia Pacific or, if such publication shall not be practicable, in a daily newspaperwith general circulation in Asia Pacific approved by the Trustee. It is expected that suchpublication will normally be made in the Asia Wall Street Journal. Any notice shall be deemed tohave been given on the second day after being so mailed or on the date of publication or, if sopublished more than once or on different dates, on the date of the first publication.
So long as the Bonds are represented by the Global Certificate and the Global Certificate is heldon behalf of Euroclear or Clearstream, Luxembourg or any other clearing system, notices toBondholders may be given by delivery of the relevant notice to Euroclear or Clearstream,Luxembourg or that other clearing system, for communication by it to entitled accountholders insubstitution for notification as required by the Conditions.
15. SUBSTITUTION
The Trustee may, without the consent of the Bondholders, agree with the Issuer and the Guarantorto the substitution in place of the Issuer (or of any previous substitute under this Condition 15) asthe principal debtor under the Bonds, the Agency Agreement and the Trust Deed with theGuarantor or any of its other Subsidiaries subject to:
(a) except in the case of the substitution with the Guarantor, the Bonds being unconditionallyand irrevocably guaranteed by the Guarantor;
(b) the Trustee being satisfied that the interests of the Bondholders will not be materiallyprejudiced by the substitution; and
(c) certain other conditions set out in the Trust Deed being complied with.
16. MEETINGS OF BONDHOLDERS, MODIFICATION, WAIVER AND AUTHORISATION
16.1 Meetings of Bondholders
The Trust Deed contains provisions for convening meetings of the Bondholders to considerany matter affecting their interests, including without limitation the modification orabrogation by Extraordinary Resolution of any of these Conditions or any of the provisionsof the Trust Deed. The quorum at any meeting for passing an Extraordinary Resolution willbe one or more persons present holding or representing more than 50 per cent. in principalamount of the Bonds for the time being outstanding, or at any adjourned such meeting one ormore persons present whatever the principal amount of the Bonds held or represented by himor them, except that, at any meeting the business of which includes the modification orabrogation of certain of the provisions of these Conditions and certain of the provisions ofthe Trust Deed, the necessary quorum for passing an Extraordinary Resolution will be one ormore persons present holding or representing not less than two-thirds, or at any adjournedsuch meeting not less than one quarter, of the principal amount of the Bonds for the time
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being outstanding. An Extraordinary Resolution passed by the Bondholders will be bindingon all Bondholders, whether or not they are present at the meeting and whether or not theyvoted on the resolution.
In addition, a resolution in writing signed by or on behalf of the holders of not less than 90per cent. of the Bonds then outstanding will take effect as if it were a duly passedExtraordinary Resolution. Such a resolution in writing may be contained in one document orseveral documents in like form, each signed by or on behalf of one or more Bondholders. AnExtraordinary Resolution also includes consent given by way of electronic consents throughthe relevant Clearing System(s) (as defined in the Trust Deed) (in a form satisfactory to theTrustee) by or on behalf of the holders of the Bonds holding not less than 90 per cent. of theBonds for the time being outstanding.
16.2 Modification, Waiver, Authorisation and Determination
The Trustee may agree, without the consent of the Bondholders, to any modification of, or tothe waiver or authorisation of any breach or proposed breach of, any of these Conditions orany of the provisions of the Trust Deed or the Agency Agreement, or determine, without anysuch consent as aforesaid, that any Event of Default shall not be treated as such (providedthat, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to theinterests of the Bondholders) or may agree, without any such consent as aforesaid, to anymodification which, in its opinion, is of a formal, minor or technical nature or to correct amanifest error or an error which, in the opinion of the Trustee, is proven.
16.3 Trustee to have Regard to Interests of Bondholders as a Class
In connection with the exercise by it of any of its trusts, powers, authorities and discretions(including, without limitation, any modification, waiver, authorisation, determination orsubstitution), the Trustee shall have regard to the general interests of the Bondholders as aclass but shall not have regard to any interests arising from circumstances particular toindividual Bondholders (whatever their number) and, in particular but without limitation,shall not have regard to the consequences of any such exercise for individual Bondholders(whatever their number) resulting from their being for any purpose domiciled or resident in,or otherwise connected with, or subject to the jurisdiction of, any particular territory or anypolitical sub-division thereof and the Trustee shall not be entitled to require, nor shall anyBondholder be entitled to claim, from the Issuer, the Guarantor, the Trustee or any otherperson any indemnification or payment in respect of any tax consequence of any suchexercise upon individual Bondholders except to the extent already provided for in Condition9 and/or any undertaking given in addition to, or in substitution for, Condition 9 pursuant tothe Trust Deed.
16.4 Notification to the Bondholders
Any modification, abrogation, waiver, authorisation, determination or substitution pursuant toConditions 15 and 16 shall be binding on the Bondholders and, unless the Trustee agreesotherwise, shall be notified by the Issuer to the Bondholders as soon as practicable thereafterin accordance with Condition 14.
17. INDEMNIFICATION AND PROTECTION OF THE TRUSTEE AND ITS CONTRACTINGWITH THE ISSUER AND THE GUARANTOR
17.1 Indemnification and Protection of the Trustee
The Trust Deed contains provisions for the indemnification of the Trustee and for its relieffrom responsibility and liability towards the Issuer, the Guarantor and the Bondholders,including (a) provisions relieving it from taking action unless indemnified and/or securedand/or pre-funded to its satisfaction and (b) provisions limiting or excluding its liability in
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certain circumstances. The Trust Deed provides that, when determining whether an indemnityor any security or pre-funding is satisfactory to it, the Trustee shall be entitled (a) to evaluateits risk in any given circumstance by considering the worst-case scenario and (b) to requirethat any indemnity or security or pre-funding given to it by the Bondholders or any of thembe given on a joint and several basis and be supported by evidence satisfactory to it as to thefinancial standing and creditworthiness of each counterparty and/or as to the value of thesecurity and an opinion as to the capacity, power and authority of each counterparty and/orthe validity and effectiveness of the security.
17.2 Trustee Contracting with the Issuer and the Guarantor
The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia,(a) to enter into business transactions with the Issuer and/or the Guarantor and/or any of theGuarantor’s other Subsidiaries and to act as trustee for the holders of any other securitiesissued or guaranteed by, or relating to, the Issuer and/or the Guarantor and/or any of theGuarantor’s other Subsidiaries, (b) to exercise and enforce its rights, comply with itsobligations and perform its duties under or in relation to any such transactions or, as the casemay be, any such trusteeship and (c) to retain and not be liable to account for any profitmade or any other amount or benefit received thereby or in connection therewith.
18. FURTHER ISSUES
The Issuer is at liberty from time to time without the consent of the Bondholders to createand issue further notes or bonds (whether in bearer or registered form) either (a) ranking paripassu in all respects (or in all respects save for the first payment of interest thereon) and sothat the same shall be consolidated and form a single series with the outstanding bonds orsecurities of any series (including the Bonds) constituted by the Trust Deed or anysupplemental deed or (b) upon such terms as to ranking, interest, conversion, redemption andotherwise as the Issuer may determine at the time of the issue. Any further bonds orsecurities which are to form a single series with the outstanding bonds or securities of anyseries (including the Bonds) constituted by the Trust Deed or any supplemental deed shall,and any other further bonds or securities may (with the consent of the Trustee), beconstituted by a deed supplemental to the Trust Deed. The Trust Deed contains provisions forconvening a single meeting of the Bondholders and the holders of bonds or securities ofother series in certain circumstances where the Trustee so decides.
19. GOVERNING LAW AND SUBMISSION TO JURISDICTION
19.1 Governing Law
The Trust Deed (including the Guarantee) and the Bonds and any non-contractual obligationsarising out of or in connection with the Bonds and the Trust Deed are governed by, and willbe construed in accordance with, English law.
19.2 Jurisdiction of Hong Kong Courts
Each of the Issuer and the Guarantor has, in the Trust Deed, irrevocably agreed for thebenefit of the Trustee and the Bondholders that the courts of Hong Kong are to haveexclusive jurisdiction to settle any disputes which may arise out of or in connection with theTrust Deed or the Bonds (including any non-contractual obligation arising out of or inconnection with the Trust Deed or the Bonds) and accordingly has submitted to the exclusivejurisdiction of the Hong Kong courts.
Each of the Issuer and the Guarantor has, in the Trust Deed, waived any objection to thecourts of Hong Kong on the grounds that they are an inconvenient or inappropriate forum.
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19.3 Appointment of Process Agent
Each of the Issuer and the Guarantor has, in the Trust Deed, irrevocably and unconditionallyappointed Huawei Tech. Investment Co., Limited at 9/F., Tower 6, The Gateway, No. 9Canton Road, Tsimshatsui, Kowloon as its agent for service of process in Hong Kong inrespect of any suit, action or proceeding arising out of or in connection with the Trust Deedor the Bonds respectively (together referred to as ‘‘Proceedings’’) and have undertaken thatin the event of such agent ceasing so to act it will promptly appoint such other person as theIssuer and/or the Guarantor may select as its agent for that purpose and will provide theTrustee with a copy of such other person’s acceptance of its appointment as process agentwithin 30 days of such cessation.
19.4 Immunity
Each of the Issuer and the Guarantor has in the Trust Deed irrevocably and unconditionallywaived and agreed not to raise with respect to the Trust Deed and the Bonds any right toclaim any immunity from jurisdiction or execution and any similar defence, and hasirrevocably and unconditionally consented to the giving of any relief or the issue of anyprocess, including, without limitation, the making, enforcement or execution against anyproperty whatsoever (irrespective of its use or intended use) of any order or judgment madeor given in connection with any Proceedings.
20. RIGHTS OF THIRD PARTIES
No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 toenforce any term of this Bond, but this does not affect any right or remedy of any person whichexists or is available apart from that Act.
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SUMMARY OF PROVISIONS RELATING TO THE BONDS IN GLOBAL FORM
The Global Certificate contains provisions which apply to the Bonds while they are in global form,some of which modify the effect of the Conditions of the Bonds set out in this Offering Circular. Thefollowing is a summary of certain of those provisions.
The Bonds will be represented by the Global Certificate which will be registered in the name of BTGlobenet Nominees Limited as nominee for, and deposited with, a common depositary for Euroclear andClearstream, Luxembourg.
Under the Global Certificate, the Issuer, for value received, will promise to pay the amount payableupon redemption under the Conditions of the Bonds in respect of the Bonds represented by the GlobalCertificate to the Bondholder in such circumstances as the same may become payable in accordance withthe Conditions of the Bonds.
The Global Certificate will become exchangeable in whole, but not in part, for Definitive Certificates if(a) Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days(other than by reason of legal holidays) or announces an intention to permanently cease business or (b)any of the circumstances described in Condition 11 of the Conditions of the Bonds occurs.
Whenever the Global Certificate is to be exchanged for Definitive Certificates, such DefinitiveCertificates will be issued in an aggregate principal amount equal to the principal amount of the GlobalCertificate within five business days of the delivery, by or on behalf of the registered Bondholder of theGlobal Certificate, Euroclear and/or Clearstream, Luxembourg to the Registrar of such information as isrequired to complete and deliver such Definitive Certificates (including, without limitation, the namesand addresses of the persons in whose names such Definitive Certificates are to be registered and theprincipal amount of each such person’s holding) against the surrender of the Global Certificate at thespecified office of the Registrar. Such exchange will be effected in accordance with the provisions of theAgency Agreement and the regulations concerning the transfer and registration of Bonds scheduledthereto and, in particular, shall be effected without charge to any Bondholder or the Trustee, but againstsuch indemnity as the Registrar may require in respect of any tax or other duty of whatsoever naturewhich may be levied or imposed in connection with such exchange.
In addition, the Global Certificate will contain provisions that modify the Conditions of the Bonds asthey apply to the Bonds evidenced by the Global Certificate. The following is a summary of certain ofthose provisions:
Payment Record Date: Each payment made in respect of the Global Certificate will be made to theperson shown as the Bondholder in the Register at the close of business (in the relevant ClearingSystem) on the Clearing System Business Day before the due date for such payment (the ‘‘RecordDate’’) where ‘‘Clearing System Business Day’’ means a weekday (Monday to Friday, inclusive)except 25 December and 1 January.
Exercise of put option: In order to exercise the option contained in Condition 8.3 of the Conditions ofthe Bonds (the ‘‘Put Option’’), the Bondholder must, within the period specified in the Conditions ofthe Bonds for the deposit of the relevant Bond Certificate and put notice, give written notice of suchexercise to the Principal Paying Agent specifying the principal amount of Bonds in respect of which thePut Option is being exercised. Any such notice shall be irrevocable and may not be withdrawn.
Notices: Notwithstanding Condition 14 of the Conditions of the Bonds, so long as the Global Certificateis held on behalf of Euroclear, Clearstream, Luxembourg or any other clearing system (an ‘‘AlternativeClearing System’’), notices to Bondholders represented by the Global Certificate may be given bydelivery of the relevant notice to Euroclear, Clearstream, Luxembourg or (as the case may be) suchAlternative Clearing System.
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USE OF PROCEEDS
The net proceeds from this offering will be approximately US$988.2 million after deducting thecommission to be charged by the Joint Lead Managers and estimated offering expenses, and will be usedfor general corporate purposes.
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EXCHANGE RATE INFORMATION
The PBOC sets and publishes daily a base exchange rate with reference primarily to the supply anddemand of Renminbi with reference to a basket of currencies in the market during the prior day. ThePBOC also takes into account other factors such as general conditions existing in the internationalforeign exchange markets.
Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and USdollars, has been based on rates set by the PBOC, which are set daily based on the previous day’sinterbank foreign exchange market rates and current exchange rates in the world financial markets. From1994 to July 2005, the official exchange rate for the conversion of Renminbi to US dollars wasgenerally stable. Although PRC governmental policies were introduced in 1996 to reduce restrictions onthe convertibility of Renminbi into foreign currency for current account items, conversion of Renminbiinto foreign exchange for capital items, such as foreign direct investment, loans or securities, requiresthe approval of the SAFE and other relevant authorities. On 21 July 2005, the PRC governmentintroduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuatewithin a regulated band based on market supply and demand and by reference to a basket of currencies.The PRC government has since made and in the future may make further adjustments to the exchangerate system. The PBOC authorised the China Foreign Exchange Trading Centre, effective since4 January 2006, to announce the central parity exchange rate of certain foreign currencies against theRenminbi at 9:15 AM each business day. This rate is set as the central parity for the trading against theRenminbi in the inter-bank foreign exchange spot market and the over the counter exchange rate for thatbusiness day. On 18 May 2007, the PBOC enlarged, effective on 21 May 2007, the floating band for thetrading prices in the inter-bank foreign exchange spot market of Renminbi against the US dollar from0.3 per cent. to 0.5 per cent. around the central parity rate. This allows the Renminbi to fluctuate againstthe US dollar by up to 0.5 per cent. above or below the central parity rate published by the PBOC. On20 June 2010, the PBOC announced that it intended to further reform the Renminbi exchange rateregime by allowing greater flexibility in the Renminbi exchange rate and on 16 April 2012, the bandwas expanded to 1.0 per cent. Such floating band was further enlarged from 1.0 per cent. to 2.0 percent., effective from 17 March 2014, as announced by the PBOC on 15 March 2014. More adjustmentsmay be made to the exchange rate system by the PRC government in the future. Currently, the PROCannounces the closing price of a foreign currency traded against Renminbi in the inter-bank foreignexchange spot market after the closing of the market on each business day, and makes it the centralparity for the following business day.
The following table sets forth the noon buying rates for US dollars in New York City for cable transferspayable in Renminbi as certified by the Federal Reserve Bank of New York for customs purposes forand as at the periods indicated as set forth in the H.10 statistical release of the Federal Reserve Board.
Noon Buying Rate
Low Average(1) High Period End
(RMB per US$1.00)2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6000 6.7603 6.8330 6.60002011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2939 6.4475 6.6364 6.29392012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2221 6.2990 6.3879 6.23012013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0537 6.1478 6.2438 6.05372014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0402 6.1704 6.2591 6.20462015
January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1870 6.2181 6.2535 6.2495February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2399 6.2518 6.2695 6.2695March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1955 6.2386 6.2741 6.1990April (through 24 April 2015) . . . . . . . . . . . . . . . 6.1927 6.2000 6.2152 6.1930
Note:
(1) Averages are calculated by averaging the rates on the last business day of each month during the relevant year. Monthlyaverages are calculated by averaging the daily rates during the relevant monthly period.
On 24 April 2015, the noon buying rate for US dollars in New York City for cable transfers inRenminbi was US$1.00 to RMB6.1930 as set forth in the H.10 statistical release of the Federal ReserveBoard.
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INDUSTRY OVERVIEW
The information and statistics set out in this section have been derived, in part, from variousgovernment publications and databases. This information has not been independently verified by theIssuer, the Guarantor, the Group, the Joint Lead Managers, the Trustee, the Agents or their respectivedirectors and advisers or any of their respective affiliates or any other party involved in this Offering.The information and statistics set out in this section may not be consistent with other information andstatistics compiled within or outside the PRC.
Carrier Business
According to the Communication Services Providers (‘‘CSP’’) Operational Technology report byGartner1, total revenue from the global carrier networks in 2014 amounted to US$171.0 billion. Thebreakdown of revenue by the three segments of CSP Operational Technology, namely, CSP-OTNetwork, CSP-OT Software and CSP-OT Services amounted to US$84.2 billion, US$17.7 billion andUS$69.1 billion, respectively. The overall market is forecast to reach US$216.9 billion by 2018,growing at 6.1% CAGR during the period.
The following chart sets forth the actual global CSP Operational Technology vendor revenue worldwidefrom 2012 to 2014 and the forecast from 2015 to 2018:
Global CSP Operational TechnologyVendor Revenue, Worldwide (US$ billion)
158.8 163.3 171.0 181.7 194.8
207.0 216.9
2012 2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015. Chart created by Huawei based on Gartner research.
According to the CSP Operational Technology report by Gartner published in 20152, Huawei was thesecond-largest vendor in terms of total carrier revenue. Among the three segments of CSP OperationalTechnology, Huawei was the largest vendor in the CSP-OT Network segment and the second-largestvendor in both CSP-OT Software and CSP-OT Services segments in 2014 globally.
1 Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’ 09January 2015.
2 Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015.
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The following chart sets forth the CSP market share by vendor revenue worldwide in 2014:
CSP Market Share by Vendor Revenue, Worldwide
17.7%16.1%
8.7% 8.2%5.6% 5.1%
2.7%
35.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Ericsson
2014 Market Share (2014 total market size: US$ 170.97 billion)
OthersNECZTECiscoNokia NetworksAlcatel-LucentHuawei
Source: Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14Update’’ 09 January 2015. Chart created by Huawei based on Gartner research.
CSP-OT Network Segment
The CSP-OT Network segment includes services for designing, building, operating and supporting CSPnetworks. This market is dominated by large equipment providers such as Huawei that supply theunderlying network infrastructure. This segment requires massive scale and sophisticated technology. Assuch, the barriers to entry are high and market changes are slow.
According to Gartner3, worldwide CSP-OT Network revenue increased year-on-year by 4.7% toUS$84.2 billion in 2014 and is forecast to grow further at a CAGR of 7.2% between 2014 and 2018 toreach US$111.1 billion by 2018. The CSP-OT Network segment is further divided into four sub-segments of (i) Fixed Access, (ii) Service Provider Routers and Switches (‘‘SPRS’’) and OpticalTransport, (iii) Mobile Infrastructure and (iv) Other Network.
3 Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’ 09January 2015.
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The following chart sets forth the actual CSP-OT Network vendor revenue worldwide from 2012 to2014 and the forecast from 2015 to 2018:
CSP-OT Network Vendor Revenue, Worldwide (US$ billion)
79.2 80.4 84.2 90.2
97.5 104.9
111.1
2012 2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015. Chart created by Huawei based on Gartner research.
After years of consolidation, the industry is dominated by a limited number of telecommunicationsequipment manufacturers such as Huawei, Alcatel Lucent, Cisco, Ericsson, NSN and ZTE, which enjoyeconomies of scale, substantial research and development resources, international distribution channelsand established relationships with a concentrated base of major telecommunications carriers. Accordingto Gartner, the top three players in the telecommunications infrastructure industry collectively accountedfor 48.9% of global market share in 2014, with the top 10 vendors having an aggregate market share of83.5% in 2014.
The underlying driver of the growth in the telecommunications infrastructure industry is the demand fornetwork bandwidth which was resulted from the proliferation of internet video and social media content,data intensive wireless devices and a widespread migration towards a more virtualised networkenvironment.
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The following chart sets forth the CSP Operational Technology Network Infrastructure market share byvendor revenue worldwide in 2014:
CSP Operational Technology Network Infrastructure Market Shareby Vendor Revenue, Worldwide
20.5%
16.5%
11.9%
8.9% 8.3% 7.8%
3.2% 2.4% 2.2% 2.0%
16.5%
Huawei Ericsson Alcatel-Lucent
Cisco ZTENetworks
Samsung JuniperNetworks
Ciena Fujitsu Others
2014 Market Share (2014 total market size: US$ 84.20 billion)
Nokia
Source: Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015Chart created by Huawei based on Gartner research.
For the sub-segments of the CSP-OT Network segment, Huawei is the largest vendor in Fixed Accessand the second-largest vendor in Mobile Infrastructure and SPRS and Optical Transport in 2014globally.
Fixed Network Infrastructure
The Fixed Network Infrastructure market, which includes Fixed Access and SPRS and OpticalTransport, has experienced healthy growth globally. Huawei, together with Cisco, Alcatel-Lucent, ZTEand Juniper, are the top five vendors in this market. According to Gartner4, total vendor revenue forFixed Access and SPRS and Optical Transport was US$38.8 billion in 2014, which is forecast to have aCAGR of 5.9% to reach US$48.9 billion in 20185.
A large part of this growth will be a result of end-user demand for broadband connectivity which hashelped to partially offset the decline in the consumer voice market. As a response to this trend, telecomcarriers are expected to continue expanding network capacity to support the growth of data demand.
4 Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015.5 Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’ 09
January 2015.
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The following chart sets forth the actual Fixed Network Infrastructure vendor revenue worldwide from2012 to 2014 and the forecast from 2015 to 2018:
Fixed Network Infrastructure Vendor Revenue, Worldwide (US$ billion)
34.8 36.7 38.8 41.4 44.0 46.6 48.9
2012 2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015. Chart created by Huawei based on Gartner data (based on total vendor revenue of Fixed Access andSPRS and Optical Transport).
The following table sets forth the SPRS and Optical Transport and Fixed Access market shareworldwide in 2014:
SPRS and Optical Transport and Fixed Access Market Share, WorldwideSPRS and Optical Transport, Worldwide, 2014
%
Cisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.9%Huawei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.8%Alcatel-Lucent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.8%Juniper. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5%Ciena. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9%ZTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7%Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6%Ericsson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8%Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.0%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%
Fixed Access, Worldwide, 2014
%
Huawei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1%Alcatel-Lucent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3%ZTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4%Cisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8%Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%
Source: Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015
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Mobile Infrastructure
The Mobile Infrastructure market currently consists of 2G (GSM), 3G (WCDMA, TD-SCDMA andCDMA2000) and 4G (LTE). The Mobile Infrastructure market is facing a paradigm shift of increasingdemand for mobile traffic and speed. Mobile Infrastructure market revenue reached US$40.1 billion in2014 and is forecast to reach US$56.0 billion in 2018 (CAGR of 8.7%). Industry analysts believe thatthe majority of this growth will come from 3G and 4G networks to support growing data demand frommobile data devices.
The following chart sets forth the actual Mobile Infrastructure vendor revenue worldwide from 2012 to2014 and the forecast from 2015 to 2018:
Mobile Infrastructure Vendor Revenue, Worldwide (US$ billion)
39.1 38.6 40.1 43.4
47.7 52.3
56.0
2012 2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015. Chart created by Huawei based on Gartner research.
Similar to the overall telecommunications infrastructure industry, the Mobile Infrastructure market isalso dominated by a small number of vendors. According to Gartner6, the top three leading MobileInfrastructure suppliers accounted for a combined 65.8% of market share in 20147. Huawei was a strongNo. 2 player whose market share increased by more than 2% year-on-year to 20.9% in 2014.
6 Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015.7 Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015.
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The following chart sets forth the Mobile Infrastructure market share by vendor revenue worldwide in2014:
Mobile Infrastructure Market Share by Vendor Revenue, Worldwide
30.4%
20.9%
14.5%
10.1% 9.4%5.9%
2.9%5.9%
Ericsson HuaweiNetworks
Alcatel-Lucent
ZTE Samsung
2014 Market Share (2014 total market size: US$ 40.14 billion)
Nokia OthersNEC
Source: Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015Chart created by Huawei based on Gartner research.
CSP-OT Software
CSPs such as telecommunications carriers and content and applications service providers depend on theCSP-OT Software to run and support their networks and IT resources, as well as the management oftheir business operations activities. The CSP-OT Software market can be categorised into OperationsSupport Systems (‘‘OSSs’’), Business Support Systems (‘‘BSSs’’) and Service Delivery Platforms(‘‘SDPs’’), as well as technical support and maintenance related to software.
CSPs are expected to continue their investments in infrastructure and application software solutions.This is driven by their transformation programs and customer experience initiatives in developedmarkets, and by the need for agile subscriber growth management in developing markets.
According to Gartner, the CSP-OT Software segment had total worldwide sales revenue of US$17.7billion in 2014, which is forecast to have a CAGR of 4.8% to reach US$21.3 billion in 2018.
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The following chart sets forth the actual CSP-OT Software vendor revenue worldwide from 2012 to2014 and the forecast from 2015 to 2018:
CSP-OT Software Vendor Revenue, Worldwide (US$ billion)
15.6 17.0 17.7 18.5 19.5 20.4 21.3
2012 2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015. Chart created by Huawei based on Gartner research.
The competition landscape in the CSP-OT Software segment is similar to the Mobile Infrastructuresegment with the top 5 players accounting for 38.0% of total market revenue in 2014.
The following chart sets forth the CSP-OT Software market share by vendor revenue worldwide in 2014:
CSP-OT Software Market Share by Vendor Revenue, Worldwide
11.0%9.9%
6.7%5.9%
4.5% 4.3% 3.9% 3.2% 3.0% 2.9% 2.3%
Ericsson HuaweiNetworks
Alcatel-Lucent
HP Accenture ZTE
2014 Market Share (2014 total market size: US$17.68 billion)
NokiaNECOracleAmdocsIBM
Source: Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015.Chart created by Huawei based on Gartner research.
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CSP-OT Services
CSP-OT Services can be categorised into CSP-OT Software Services and CSP Network InfrastructureServices. The former encompasses services as part of wider transformation efforts and integrationservices and enhancements of existing legacy environments across multiple technologies covering largeheterogeneous systems, applications and infrastructure, while the latter encompasses services related toCSP networks including consulting, network planning and design, network integration and testing.
The CSP service expenditure growth is fueled by LTE rollouts and CSPs’ digital transformationprograms. As CSPs accelerate their network transformation including Software-Defined Networking(‘‘SDN’’) and Network Functions Virtualisation (‘‘NFV’’), operations strategy and transformation designservices will be in higher demand.
According to Gartner, the CSP-OT Services segment had total sales revenue worldwide of US$69.1billion in 2014, which is forecast to have a CAGR of 5.2% to reach US$84.5 billion in 20188.
The following chart sets forth the actual CSP-OT Services vendor revenue worldwide from 2012 to 2014and the forecast from 2015 to 2018:
CSP-OT Services Vendor Revenue, Worldwide (US$ billion)
64.1 65.9 69.1 73.0 77.8 81.7 84.5
2012 2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’09 January 2015. Chart created by Huawei based on Gartner research.
8 Gartner ‘‘Forecast: Communications Service Provider Operational Technology, Worldwide, 2011-2018, 4Q14 Update’’ 09January.
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The following chart sets forth the CSP-OT Services market share by vendor revenue worldwide in 2014:
CSP-OT Services Market Share by Vendor Revenue, Worldwide
21.1%
12.1%10.0%
6.1%4.0% 3.4% 2.9% 2.8% 2.7%
Ericsson Huawei NokiaNetworks
Alcatel-Lucent
Accenture NEC
2014 Market Share (2014 total market size: US$69.09 billion)
AmdocsCiscoIBM
Source: Gartner ‘‘Market Share: Communications Service Provider Operational Technology, Worldwide, 2014’’ 30 March 2015.Chart created by Huawei based on Gartner research.
Enterprise Business
As the influence of innovative ICT technologies such as cloud computing, Big Data, IoT and mobilityon traditional industries continues to increase, the enterprises’ value creation approach and businessmodels are evolving fast. The exponential increase in the volume of data being handled by enterprisenetworks has elevated requirements for more flexible and automated network environments at a lowercost. Companies are faced with a digital reconfiguration typical of the information age and ICT hasbecome both a production system and core competency driving business transformation and innovation.
Traditional static network architecture is no longer suited for adapting to the dynamic, scalable servicerequirements of mobile, data intensive and interactive enterprise applications. New network architecturesincorporating SDN and NFV are helping to create smart and flexible network and product architecture.Network hardware is being decoupled from software to allow optimum configuration of networkresources, unified hardware platforms and flexible resources sharing, allowing networks to automate andscale up operations based on services volume.
Applying IT technologies to enterprise networks requires placing cloud data centres at the heart of thenetwork architecture. As a result, data centres will become the core of ICT infrastructure as opposed todisparate servers and storage equipment deployed by enterprises in the past.
The Enterprise Hardware and Solutions market can be broadly classified into the categories below:
• Enterprise Network Equipment: This segment includes the building blocks of networking includingRouters, Ethernet Switches, WLAN equipment and Network Security Equipment such as firewallsand secure routers;
• Data Centre/Cloud Equipment: This segment comprises enterprise-grade servers and storageequipment, which provide the computing, data processing and data repository functionalities inEnterprise ICT architecture; and
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• Unified Communications and Collaboration (‘‘UC&C’’): This segment includes technologies andsolutions geared towards enterprise communication and collaboration applications such astelepresence and videoconferencing, VoIP, customer premise equipment and hosted contact centres.
Enterprise equipment vendors typically overlay the equipment or solutions above with ICT infrastructureservices including technical support and maintenance, network planning, consulting and networkoptimisation.
According to Gartner9, the total Enterprise IT spending across industry verticals stood at US$2,731billion in 2014 and is forecast to reach US$3,079 billion by 2018, at a 3.0% CAGR. Banking andSecurities, Manufacturing and Natural Resources, Government, Communications and Media and Servicesconstituted 67.5% of the total spending in 2014 and are expected to remain similarly large constituentsover the next four to five years.
The following chart sets forth the actual Enterprise IT spending by vertical industry market worldwidefor 2014 and the forecast from 2015 to 2018:
Enterprise IT Spending by Vertical Industry Market, Worldwide 2014 (US$ billion)
Source: Gartner ‘‘Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2012-2018, 4Q14 Update’’ 22January 2015 Chart created by Huawei based on Gartner research.
Huawei emphasises open collaboration and constant innovation in offering Enterprise ICT infrastructuresolutions and seeks to partner with other industry players in offering innovative, customised productsand solutions that provide its customers with a leading edge.
9 Gartner ‘‘Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2012-2018, 4Q14 Update’’ 22 January2015.
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Enterprise Network Equipment
According to Gartner, the global vendor revenue for Enterprise Network Equipment stood at US$37.8billion in 2014, and is expected to stay stable with a 0.8% CAGR reaching US$39.0 billion by 201810,which Huawei believes is driven by the twin trends of virtualisation and product commoditisation.Increasing demand for converged and customised solutions at a lower cost are providing players such asHuawei with opportunities to gain market share from historically dominant players. According toGartner, Huawei expanded its revenue market share in the Enterprise Network Equipment market to3.5% in 2014 and was ranked No.3 after Cisco and HP.
The following chart sets forth the actual global vendor revenue for Enterprise Network Equipment from2013 to 2014 and the forecast from 2015 to 2018:
Global Vendor Revenue for Enterprise Network Equipment (US$ billion)
36.1
37.8
39.1 39.3 39.4 39.0
2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: Enterprise Network Equipment by Market Segment, Worldwide, 4Q14 and 2014’’ 24 March 2015.Chart created by Huawei based on Gartner research.
Among the various segments of the market, Ethernet Switches comprised approximately 55.7% ofvendor revenue as at 2014, followed by Network Security Equipment (18.8%), WLAN equipment(11.0%) and Traditional Routers (7.6%) according to Gartner estimates.
Switches
Ethernet Switches serve the function of creating a network by connecting devices and managingdataflow via packet switching to receive, process and forward data to a destination device. EthernetSwitches represented approximately 84% of the enterprise LAN equipment spending, while WLANaccounted for the balance. Ethernet Switches are segmented by bandwidth (such as 100Mbps, 1,000Mbps and 10Gbps) as well as by location (campus switches comprise 60% of global vendor revenue,while data centre switches comprise the remaining 40%) according to Gartner11.
Huawei was listed as the fastest-growing provider in the global data centre switch market in 2014 with agrowth rate of 137%, according to IDC Worldwide Quarterly Datacentre Networks Qview. Huawei’sS12700 Series Agile Switches was awarded the 2014 Interop Tokyo Enterprise Networking Special Prizeand the SDN Solution award from the United States-based Network World.
10 Gartner, ‘‘Forecast: Enterprise Network Equipment by Market Segment, Worldwide, 2012-2019, 1Q15 Update’’ 31 March2015.
11 Gartner ‘‘Market Share: Enterprise Network Equipment by Market Segment, Worldwide, 4Q14 and 2014’’ 24 March 2015.
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Routers
Enterprise Traditional Routers serve as a gateway and dispatcher for connecting and routing data acrossmultiple networks. Within the Routers sub-segment, Huawei was the second-largest vendor worldwide in2014 with a 15.3% market share according to Gartner12.
WLAN
Wireless LAN equipment connects multiple devices on a network using wireless distribution protocolswithin a limited area. The WLAN market has been one of the fastest growing markets in networking,driven by increasing demand for connecting multiple devices to the Internet in workplaces, replacinglegacy wired infrastructure with Wi-Fi access points as well as complex business requirements such assecure guest access and policy enforcement driven by enterprise Bring Your Own Device (‘‘BYOD’’)adaptations. WLAN equipment includes stand-alone access points, coordinated access points, controllersand enhancement products, which accounted for 4%, 61%, 19% and 16% of the segment spending in2014, respectively13. According to Gartner’s Magic Quadrant for the Wired and Wireless LAN AccessInfrastructure report, Huawei is positioned in the Challengers quadrant14.
Security
Network Security Equipment includes firewall equipment, specialised IPS equipment and secure routers,which accounted for 74%, 17% and 9% of the segment spending in 2014, respectively according toGartner estimates15.
Servers
According to Gartner16, the total global market volume for Servers vendor revenue is forecast toincrease from around US$50.6 billion in 2014 to US$52.5 billion in 2018. Among the different types ofCPU servers, the most common are Industry Standard Servers (‘‘ISS’’), commonly referred to as x86servers, which comprised approximately 81% of the overall Servers market by vendor revenue in 2014.According to Gartner17, the x86 servers segment is forecast to expand at a 2.1% CAGR over 2014 to2018 to reach US$44.9 billion in market size by 2018. The overall vendor revenue in the global Serversmarket is forecast to grow at a slower 0.9% CAGR according to Gartner estimates. Huawei believes thatglobal vendor revenue continues to be pressured by the ongoing trends of weak end-market demand,server virtualisation, infrastructure convergence and availability of reliable and scalable ISS servers atlower price points.
12 Gartner ‘‘Market Share: Enterprise Network Equipment by Market Segment, Worldwide, 4Q14 and 2014’’ 24 March 2015.13 Gartner ‘‘Market Share: Enterprise Network Equipment by Market Segment, Worldwide, 4Q14 and 2014’’ 24 March 2015.14 Gartner ‘‘Magic Quadrant for the Wired and Wireless LAN Access Infrastructure’’ Tim Zimmerman et al, 26 June 2014.
Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advisetechnology users to select only those vendors with the highest ratings or other designation. Gartner research publicationsconsist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartnerdisclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability orfitness for a particular purpose.
15 Gartner ‘‘Market Share: Enterprise Network Equipment by Market Segment, Worldwide, 4Q14 and 2014’’ 24 March 2015.16 Gartner ‘‘Forecast: Servers, All Countries, 2012-2019, 1Q15 Update’’ 20 March 2015.17 Gartner ‘‘Forecast: Servers, All Countries, 2012-2019, 1Q15 Update’’ 20 March 2015.
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The following chart sets forth the actual global vendor revenue for Servers by form factor from 2013 to2014 and the forecast from 2015 to 2018:
Global Vendor Revenue for Servers by Form Factor (US$ billion)
38.72 41.30 41.09 42.43 43.78 44.91 50.21 50.59 49.69 50.95 51.83 52.49
2013 2014 2015 2016 2017 2018
x86 Servers (All CPU)
Source: Gartner ‘‘Forecast: Servers, All Countries, 2012-2019, 1Q15 Update’’ 20 March 2015. Chart created by Huawei basedon Gartner research.
According to Gartner, Huawei was the fifth largest player globally in terms of x86 global servershipments among branded server OEMs, behind HP, Dell, IBM and Lenovo18.
Storage
Enterprise Storage Equipment provides centralised repositories for data backup, access and recovery.External Controller-Based Disk Storage comprises the bulk of this market and stood at US$22.9 billionin global vendor revenue in 2014 as per Gartner estimates19.
While global end-market demand has continued to stay suppressed over the last few years, next-generation data centres have also spurred trends such as storage virtualisation, web-scale public cloud asan alternative storage architecture and software-defined storage. These trends will continue to reshapethe Enterprise storage segment in coming years, providing opportunities for storage vendors who canprovide innovative, customised and integrated ICT solutions. Gartner forecasts the vendor revenue in theglobal market to grow at 1.4% CAGR over 2014 to 2018 to reach US$24.2 billion by 201820. In China,Huawei was ranked No.1 in terms of revenue, number of units and capacity and market share in 2014.In addition, Huawei was listed as a challenger for the first time in Gartner’s General Purpose Disk ArrayMagic Quadrant in 201421.
18 Gartner ‘‘Quarterly Statistics: Servers, Worldwide, 4Q14 Update’’ 02 March 2015.19 Gartner ‘‘Forecast: External Controller-Based Storage, Worldwide, All Countries, 2015-2019, 1Q15 Update’’ 25 March
2015.20 Gartner ‘‘Forecast: External Controller-Based Storage, Worldwide, All Countries, 2015-2019, 1Q15 Update’’ 25 March
2015.21 Gartner “Magic Quadrant for General-Purpose Disk Arrays” Stanley Zaffos et al, 20 November 2014.
Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advisetechnology users to select only those vendors with the highest ratings or other designation. Gartner research publicationsconsist of the opinions of Gartner’s research organisation and should not be construed as statements of fact. Gartnerdisclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability orfitness for a particular purpose.
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The following chart sets forth the actual global vendor revenue for External Controller-Based DiskStorage from 2013 to 2014 and the forecast from 2015 to 2018:
Global Vendor Revenue for External Controller-Based Disk Storage (US$ billion)
22.5
22.9
23.2
23.6 23.9
24.2
2013 2014 2015 2016 2017 2018
Source: Gartner ‘‘Forecast: External Controller-Based Storage, Worldwide, All Countries, 2014-2019, 1Q15 Update’’ 25 March2015. Chart created by Huawei based on Gartner research.
Unified Communications and Collaboration
The global market is transitioning from legacy telephony and messaging platforms to new UC&Cplatforms and solutions. Industry trends such as targeted lower cost solutions, BYOD and browser basedReal-Time Communications are making UC&C applications appealing to Small and Midsize Businesses(‘‘SMBs’’). IDC has identified Huawei as a major player in the Unified Communications andCollaboration segments. Gartner has also placed Huawei among the ‘‘Challengers’ in the Gartner MagicQuadrant for contact centre infrastructure worldwide.
Consumer Business
Consumer Business targets retail customers who are looking for a broad range of entertainment,communications and information experiences through the application and use of modern mobile devices,including smartphones, mobile broadband devices and home networking devices.
Smartphones
The global smartphone industry is seeing robust growth, especially amid surging demand in theemerging markets. The advent of high-performance and affordable Android-based smartphones is a keycatalyst in driving smartphone adoption. According to a report by Strategy Analytics, global smartphonesales grew from approximately 990 million units in 2013 to approximately 1,250 million units in 2014.Sales are forecast to reach approximately 1,766 million units in 2020, representing a CAGR of 5.9%.
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The following chart sets forth the actual global Smartphone sales from 2011 to 2014 and the forecastfrom 2015 to 2020:
Global Smartphone Sales (million of units)
491700
990
1,2501,394
1,501 1,584 1,651 1,711 1,766
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Strategy Analytics
China’s smartphone industry benefits from the increasing spending power of Chinese consumers.According to Strategy Analytics, the number of smartphones sold in China surged from approximately320.4 million units in 2013 to approximately 421.8 million units in 2014. The sales are forecast tofurther increase to approximately 527.0 million units in 2020, representing a CAGR of 3.8%. China firstovertook the United States in smartphone sales in the third quarter of 2011 as the largest smartphonemarket globally and the two countries are expected to retain their first and second positions respectivelythrough 2018.
Strategy Analytics forecasts that global smartphone sales will grow at a better rate of 11.5% in 2015,comfortably offsetting the slowdown in featurephone volumes. However, the current growth rate forsmartphones worldwide is below the 45% average annual rate seen in the period from 2011 to 2014 aspenetration in several regions starts to plateau. In many developed markets such as North America andWestern Europe, smartphones already comprised the majority of all handsets sold and the growth rate ofsales is moderating, although growth remains rapid in developing markets such as India, led by theboom in lower-priced Android, Android One and Firefox models. India is expected to overtake theUnited States for second place in smartphone sales in 2019.
Asia Pacific will remain the primary driver of global smartphone sales growth in 2015 with a growthrate of 13.1% and will account for 54.9% of global sales. Asia Pacific contains three of the top 10global smartphone countries in 2014. While Strategy Analytics forecasts that Asia Pacific’s share of theglobal market may saturate, it continues to recommend that smartphone vendors prioritise the region forits scale and potential growth.
With Asia Pacific’s share of the global smartphone market reaching a plateau in the next three years,Strategy Analytics forecasts that substantial parts of the new growth will come from Central and LatinAmerica and the Africa and Middle East region. Africa and Middle East’s global share is expected toincrease to 9.6% in 2020, up from 6.6% in 2014. Major nations, such as South Africa, Nigeria and SaudiArabia, will be launching 3G or 4G networks and rolling out greater volumes of smartphones in thecoming years.
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The following table sets forth the actual Smartphone sales for the Asia Pacific region from 2011 to 2014and the forecast from 2015 to 2020:
Asia Pacific Smartphone Sales (million of units)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
China . . . . . . . . . . . . . . 87.6 173.4 320.4 421.8 465.5 491.0 504.0 512.1 520.1 527.0India . . . . . . . . . . . . . . . 10.9 20.5 49.8 84.8 106.0 125.5 146.0 164.0 181.1 199.6Indonesia . . . . . . . . . . . . 9.0 10.0 11.7 23.4 34.0 38.4 42.0 44.2 46.0 47.3Japan . . . . . . . . . . . . . . . 24.9 36.5 42.9 42.8 42.9 43.2 43.4 43.7 43.9 44.1South Korea . . . . . . . . . . 17.5 30.7 24.0 22.0 22.8 23.5 24.2 24.7 25.1 25.4Vietnam . . . . . . . . . . . . . 2.5 4.0 7.4 11.8 14.0 15.7 17.0 18.4 19.5 20.4Philippines . . . . . . . . . . . 5.0 6.5 7.9 10.4 12.0 13.7 15.3 16.7 17.9 19.0Thailand. . . . . . . . . . . . . 4.4 5.3 7.5 10.8 12.3 13.5 14.5 15.5 16.2 17.0Others . . . . . . . . . . . . . . 28.1 32.8 39.1 49.0 55.7 62.6 68.7 74.2 79.1 84.1
Total . . . . . . . . . . . . . . . 189.9 319.7 510.7 676.8 765.2 827.1 875.1 913.5 948.9 983.9
Source: Strategy Analytics
According to Strategy Analytics, the more mature markets of North America and Western Europe willsee their global shares decrease due to high penetration rates and slower growth rates. North Americawill account for approximately 11.4% of worldwide smartphone sales in 2015, which is forecast to dipto approximately 10.0% in 2020. Similarly, Western Europe’s share will likely fall from approximately10.5% in 2015 to approximately 9.6% in 2020. Central and Eastern Europe’s share of the global marketis forecast to hold steady around the 5.0% level through 2020, led by Russia and Poland.
The following table sets forth the actual percentage of global Smartphone sales for each region from2011 to 2014 and the forecast from 2015 to 2020:
Global Smartphone Sales by Regions
Global Smartphone Sales:% of Total 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
North America 22.2% 17.7% 14.1% 12.0% 11.4% 11.0% 10.7% 10.4% 10.2% 10.0%Western Europe 19.6% 17.1% 13.9% 11.3% 10.5% 10.2% 10.0% 9.9% 9.8% 9.6%Asia Pacific 38.7% 45.7% 51.6% 54.1% 54.9% 55.1% 55.3% 55.3% 55.5% 55.7%Central & Latin America 7.4% 8.5% 9.8% 11.0% 10.7% 10.6% 10.5% 10.4% 10.3% 10.2%Central & Eastern Europe 6.0% 5.8% 5.2% 5.0% 5.0% 4.9% 4.9% 4.9% 4.8% 4.8%Africa & Middle East 6.1% 5.2% 5.4% 6.6% 7.5% 8.2% 8.7% 9.1% 9.4% 9.6%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Strategy Analytics
According to Strategy Analytics, Huawei is the third largest smartphone vendor globally in terms oftotal shipment and shipped a robust 74.1 million smartphones worldwide in 2014, representing 47.0%year-on-year growth as compared to 201322. Huawei significantly outperformed the market. In 2014,Huawei distributed approximately 63.4% of its total smartphones in the Asia Pacific collectively andincreased its market share to approximately 6.9% in the region according to IDC. China remainsHuawei’s core focus due to a strong presence in the TD-SCDMA and CDMA markets and improvedvolumes in the LTE segment. In Western Europe, Huawei maintains strong growth as its market shareincreased to over 4.2% in 2014 due to its improving international expansion strategy, including localisedmanagement teams and continuing investment in R&D facilities across Europe. In Africa and the MiddleEast, Huawei is growing strongly as a result of low-cost Android models. Huawei distributedapproximately 13.4% of its total smartphones in the region and increased its market share to over 8.9%
22 Lenovo’s shipments and Motorola’s shipments are counted separately without combined together as for ranking.
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in 2014. Huawei shipped approximately 10.2% of its total smartphones to Latin America and increasedits market share to approximately 5.6% in 2014. Huawei also distributes its smartphones in NorthAmerica as well as Central and Eastern Europe.
The following table sets forth the global smartphone vendor shipments of the leading smartphonevendors from 2011 to 2014:
Highlights of Leading Smartphone Vendors
Global Smartphone Vendor Shipments(million of units) 2011 2012 2013 2014
Samsung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.4 213.0 319.8 317.2Apple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.0 135.8 153.4 192.7Huawei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.8 30.2 50.4 74.1Xiaomi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 5.7 18.7 61.1LG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2 26.3 47.6 59.2Lenovo(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 23.5 45.8 59.0Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263.1 265.6 354.3 520.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490.5 700.1 990.0 1,283.5
Source: Strategy Analytics
Note:
(1) Figures do not include global smartphone vendor shipments of Motorola, which totaled 18.6 million, 19.1 million, 16.3million and 33.7 million units for 2011, 2012, 2013 and 2014 respectively.
Mobile Broadband Devices
Mobile broadband devices, consisting mainly of mobile modules and data cards which provideconnectivity, convenience and efficiency, have become increasingly popular in modern society.Investment in deploying higher-speed networks has driven strong growth in the number of mobilebroadband connections in recent years.
Mobile broadband is device agnostic and covers a range of technologies including CDMA 2000,EV-DO, WCDMA HSPA, TD SCDMA, WiMAX and LTE. Mobile broadband offers consumers a viablesubstitute for a fixed broadband connection, especially in those markets where fixed broadbandpenetration is relatively low or where fixed broadband networks have not been fully upgraded to offerhigher data speeds.
There is an ongoing technology shift in the global connection base, driven by improving coverage ofhigher-speed networks and the increased affordability of more advanced handsets and devices. Theincrease in 4G connections reflects the acceleration in LTE deployments in many countries across theworld. Currently, the United States, Japan, and South Korea are leaders in terms of LTE connections.Going forward, the focus will shift towards Asia, with the growth being led by China.
Huawei is a global leader and focuses on developing innovative features in its mobile broadbanddevices. In 2014, the total global shipments of Huawei’s mobile broadband modules and data cardsreached approximately 5.1 million sets and 28.1 million sets respectively.
Home Devices
Home networking devices include a wide range of products for home internet and home media, such astablets, routers, TV set-top-boxes and other accessories. Huawei is a key innovator of stylish homedevices and delivered approximately 26.6 million units to families all over the world in 2014.
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According to a report by Gartner, global tablet shipments in 2014 amounted to approximately 226million units while worldwide tablet shipments will reach approximately 237 million units in 2015,representing a 5% year-on-year increase23. While the overall growth rate has been moderating fromdouble digits as seen before, Huawei believes that the demand for tablets continues to be strong inChina driven by under-penetration and the continued shift from PC to mobile. In addition, recenttechnological advancements, including improved visual experience, superior performance and cost-saving features have enhanced the adoption of tablets in China.
CPE devices including routers, switches and residential gateways are core elements of the smart familyecosystem and provide traffic gateways for family internet. In 2014, according to Infonetics Research,Huawei was the largest provider of DSL CPE devices globally in 2014, with shipments of 17.2 millionunits, capturing an approximately 18.5% market share.
The TV set-top-box provides a one-stop-shop home entertainment platform. Its sales grow steadilydriven by upgrades and increased adoption. The market for accessories is fragmented. Companies investin developing accessories to extend the ecosystem of the core consumer brand and to strengthencustomer loyalty. Huawei makes strategic investments into smart wearables and smart home domains.Huawei’s first wearable TalkBand B1 was launched globally in 2014 and was rapidly recognised in themarket for its unique innovative architecture.
23 Gartner ‘‘Forecast: PCs, Ultramobiles and Mobile Phones, Worldwide, 2012-2019, 1Q15 Update’’ 16 March 2015.
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CAPITALISATION AND INDEBTEDNESS
The following table sets forth the Guarantor’s consolidated capitalisation and indebtedness as at 31December 2014 and as adjusted to give effect to the issue of the Bonds. This table should be read inconjunction with the Guarantor’s consolidated financial statements as at and for the year ended 31December 2014 and the accompanying notes included in this Offering Circular.
The as adjusted information in the following table below is illustrative only and does not take intoaccount any changes in the Guarantor’s capitalisation and borrowings after 31 December 2014, otherthan to give effect to the issue of the Bonds and the receipt of the proceeds from the offering beforededucting the commissions and estimated offering expenses. The translations from RMB to US$ weremade at the rate of RMB6.1958 to US$1.00, being the median rates set by the PBOC for foreignexchange transactions prevailing on 31 December 2014.
As at 31 December 2014
Actual As adjusted
(RMB’000) (US$’000) (RMB’000) (US$’000)Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 78,047,655 12,596,865 78,047,655 12,596,865Short term loans and borrowings(1) . . . . . . . . . . . . . 10,529,847 1,699,514 10,529,847 1,699,514Long-term interest-bearing borrowings
Long-term interest-bearing borrowings . . . . . . . . . 17,576,885 2,836,903 17,576,885 2,836,903Bonds to be issued(2) . . . . . . . . . . . . . . . . . . . . . – – 6,195,800 1,000,000
Total long-term interest-bearing borrowings . . . . . . . 17,576,885 2,836,903 23,772,685 3,836,903Total interest-bearing borrowings . . . . . . . . . . . . . . . 28,106,732 4,536,417 34,302,532 5,536,417Total equity(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,985,077 16,137,557 99,985,077 16,137,557
Total capitalisation(4) . . . . . . . . . . . . . . . . . . . . . . 128,091,809 20,673,974 134,287,609 21,673,974
(1) Short term loans and borrowings include the current portion of long term interest bearing borrowings.
(2) Refers to the aggregate principal amount of the Bonds of US$1,000,000,000 before deducting the commissions andestimated offering expenses.
(3) Total equity includes paid-in capital, capital surplus, reserves and retained earnings.
(4) Total capitalisation equals to the sum of total interest-bearing borrowings and total equity.
Except as described above and in ‘‘Description of the Group – Indebtedness’’, there has not been anymaterial change in the Guarantor’s capitalisation and indebtedness since 31 December 2014.
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DESCRIPTION OF THE ISSUER
Formation
Proven Honour Capital Limited is a limited liability company incorporated under the BVI BusinessCompanies Act, 2004 (as amended) (Company Number: 1697091). It was incorporated in the BritishVirgin Islands on 22 February 2012. The Issuer is a wholly-owned subsidiary of the Guarantor.
Business Activity
The Issuer was established for the purpose of issuing the Bonds, the CNY1,000,000,000 5.30 per cent.bonds due 2015 issued on 18 May 2012 (the ‘‘2012 Bonds’’) and the CNY1,600,000,000 4.55 per cent.guaranteed bonds due 2017 issued on 23 September 2014 (the ‘‘2014 Bonds’’). The Issuer has notengaged, since the date of its incorporation, in any other material activities other than those relating tothe issue of the 2012 Bonds, the 2014 Bonds, the proposed issue of the Bonds and the on-lending of theproceeds thereof to the Guarantor and/or any other subsidiary of the Guarantor and the authorisation ofdocuments and agreements referred to in this Offering Circular to which it is or will be a party.
Financial Statements
Under British Virgin Islands law, the Issuer is not required to publish interim or annual financialstatements. The Issuer has not published, and does not propose to publish, any financial statements. TheIssuer is, however, required to keep proper books of account as are necessary to give a true and fairview of the state of the Issuer’s affairs and to explain its transactions.
Directors and Officers
The directors of the Issuer as at the date of this Offering Circular are Guo Ping and Meng Wanzhou.The Issuer has no employees.
Share Capital
The Issuer is authorised under its memorandum of association to issue a maximum of 50,000 shares ofUS$1.00 par value each and 10,000 shares have been issued to, and are held by, Huawei Tech.Investment Co., Ltd. The register of members of the Issuer is maintained at its registered office in theBritish Virgin Islands at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, BritishVirgin Islands. No part of the equity securities of the Issuer is listed or dealt on any stock exchange andno listing or permission to deal in such securities is being or is proposed to be sought. As at the date ofthis Offering Circular, the Issuer does not have any debt outstanding other than the 2012 Bonds and the2014 Bonds.
Capitalisation and Indebtedness of the Issuer
The following table sets out the capitalisation and indebtedness of the Issuer as at 31 December 2014and as adjusted to give effect to the issue of the Bonds and the receipt by the Issuer of the proceedsfrom the offering before deducting commissions and estimated offering expenses. The translations fromRMB to US$ were made at the rate of RMB6.1958 to US$1.00, being the median rates set by the PBOCfor foreign exchange transactions prevailing on 31 December 2014:
As at 31 December 2014
Actual Actual As adjusted As adjusted
(RMB’000) (US$’000) (RMB’000) (US$’000)Borrowings
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . 2,580,752 416,532 2,580,752 416,532Bonds to be issued(1) . . . . . . . . . . . . . . . . . . . . . – – 6,195,800 1,000,000Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,230) (683) (4,230) (683)
Total capitalisation(2) . . . . . . . . . . . . . . . . . . . . . . 2,576,522 415,849 8,772,322 1,415,849
(1) Refers to the aggregate principal amount of the Bonds of US$1,000,000,000 before deducting the commission and estimatedoffering expenses.
(2) Total capitalisation equals to the sum of total interest-bearing borrowings and total equity.
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DESCRIPTION OF THE GROUP
Overview
Huawei is a global leader of ICT solutions. Continuously innovating based on customer needs, Huaweiis committed to enhancing customer experiences and creating maximum value for telecom carriers,enterprises and consumers. Huawei’s telecom network equipment, IT products and solutions and smartdevices are used in over 170 countries and regions, serving over one-third of the world’s population.Huawei was ranked No. 285 among the Fortune Global 500 in 2014 and employed approximately170,000 people worldwide as at 31 December 2014.
Huawei is committed to building a better connected world. By leveraging its experience and expertise inthe ICT sector, Huawei helps bridge the digital divide by providing opportunities to enjoy broadbandservices, regardless of geographic location.
Huawei currently operates in the following three business segments:
• Carrier Business: Develops and manufactures a wide range of wireless networks, fixed networks,global services, carrier software, core networks and network energy solutions fortelecommunication operators;
• Enterprise Business: Develops integratable ICT products and solutions including enterprisenetwork infrastructure, cloud-based green data centres, enterprise information security, unifiedcommunication and collaboration and delivers these solutions to vertical industries such asgovernments and public utilities, enterprises, energy, power, transportation and finance; and
• Consumer Business: Develops and manufactures mobile broadband devices, home devices,smartphones as well as the applications on these devices and delivers them to consumers andbusinesses.
While Huawei offers comprehensive products and services to the three distinct customer groups, itmanages and controls its main research, manufacturing, procurement, IT systems and administration on acentralised basis. Huawei has set up 16 R&D centres in countries such as Germany, Sweden, the UnitedStates, India, Japan, Canada and China. As at 31 December 2014, Huawei had approximately 76,000R&D specialists, approximately 45% of its total workforce worldwide. To contribute to the sustainabledevelopment of society, the economy and the environment, Huawei has created a wide range of greensolutions that enable consumers to reduce power consumption, carbon emissions and resource costs.
Huawei has experienced sustainable growth over the years and its revenue increased from RMB239,025million in 2013 to RMB288,197 million in 2014, representing a year-on-year growth of 20.6%. Huaweihas also achieved steady profit growth in recent years and its net profit amounted to RMB21,003 millionand RMB27,866 million in 2013 and 2014, respectively.
Geographical Distribution
The following table sets forth Huawei’s revenue by geographic location for the years indicated:
Year ended 31 December
2013 2014
(RMB inmillions) %
(RMB inmillions) %
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,785 34.6 108,881 37.8EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,006 35.1 100,990 35.0Asia Pacific (excluding China) . . . . . . . . . . . . . . . . 38,691 16.2 42,424 14.7Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,346 12.3 30,852 10.7Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,197 1.8 5,050 1.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,025 100.0 288,197 100.0
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Organisation
Huawei is a private company wholly-owned by its employees. Shareholders of Huawei are the union ofHuawei Investment & Holding Co., Ltd. (the ‘‘Union’’) and Mr. Ren Zhengfei.
Through the Union, the company implements an Employee Shareholding Scheme (the ‘‘Scheme’’),which involved 82,471 employees as at 31 December 2014. This Scheme effectively aligns employeecontributions with the company’s long-term development, fostering Huawei’s continued success. See‘‘The Shareholding Structure of the Guarantor’’ for further information on the Scheme. Mr. RenZhengfei is the individual shareholder of the company and also participates in the Scheme. As at 31December 2014, Mr. Ren Zhengfei’s investments (including those held directly by himself and throughthe Union) accounted for nearly 1.4% of Huawei’s total share capital.
The following chart sets forth a simplified corporate and shareholding structure of the Group as at 31December 2014:
Notes:
(1) Refers to the shareholding in Huawei held by Mr. Ren Zhengfei as an individual shareholder.
(2) Entities shaded in grey refer to the principal subsidiaries of Huawei.
Below is a brief description of the principal subsidiaries of Huawei:
• Huawei Technologies Co., Ltd. is engaged in the development, manufacture and sale oftelecommunication products and the technical support and maintenance of electrical equipment andspare parts.
• Huawei International Pte. Ltd. is incorporated in Singapore and is engaged in the trading oftelecommunication equipment.
• Huawei Device Co., Ltd. is engaged in the development, manufacture and sale of mobilecommunication products and electrical parts.
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• Huawei Device (Dongguan) Co., Ltd. is engaged in the design, development, manufacture and saleof telecommunication and information products, auxiliary parts and the provision of consulting andafter-sale services. It also engages in the design, development, manufacture and sale of satellite TVreceiving antennas, tuners, digital satellite TV receivers and the import and export business.
• Huawei Tech. Investment Co., Limited is incorporated in Hong Kong and is engaged in the tradingof imported materials, sale of overseas devices (excluding the United States) and overseasmachinery.
• Huawei Technologies Coöperatief U.A. is incorporated in the Netherlands and invests in overseassubsidiaries.
Corporate History
1987: Founded by Mr. Ren Zhengfei and several other investors with an investment ofUS$3,500 as a reseller of PBX switches under the name of Hong Kong Hong NianCompany.
1992: Developed HJD analog switches that supported 48 ports.
1993: Developed C&C08 digital switches, which were primarily deployed in rural areas.
1997: Started engaging global top consulting firms for management transformation.
1999: Established the first international R&D centre in Bangalore, India.
2000: Made significant progress in developing countries such as Uzbekistan.
2005: Became a preferred supplier for top carriers such as BT and Vodafone. Revenue fromAsia-Pacific, the Americas and EMEA exceeded that of the domestic market for the firsttime.
2009: Deployed the world’s first LTE network in Northern Europe.
2010: Transformed from a CT company to an ICT company and established three BGs.
2011: Established the future-facing 2012 Laboratories, which focuses on next-generationnetwork technologies, including 5G, NG-PON and next-generation Internet.
2012: Introduced SoftCOM to help streamline operator networks and IT resources andreconstruct the telecommunications industry in terms of architecture, networks, servicesand operations.
2013: Launched the world’s first service and user experience-centric agile networkarchitecture, along with the first-of-its-kind agile switch S12700.
2014: To adapt to the ICT convergence trend, established the Products & Solutionsdepartment by integrating R&D platforms to reduce operating costs and providecustomers with more competitive solutions.
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Competitive Strengths
Huawei believes that its continuous business success is largely attributable to the following uniquecompetitive strengths:
A global leading innovator with world-class R&D capabilities and cutting-edge technologies
Huawei is globally acclaimed for its innovation and invention. In 2014, Huawei was:
• No. 50 most innovative company in Boston Consulting Group’s The Most Innovative Companies2014. Huawei was one of the four Chinese companies on the list; and
• 2014 Top 100 Global Innovators by Thomson Reuters
R&D is a core pillar of Huawei’s continuous success. Huawei has set up 16 R&D centres in countriessuch as Germany, Sweden, the United States, India, Japan, Canada and China. As at 31 December 2014,Huawei had approximately 76,000 R&D specialists, approximately 45% of its total workforceworldwide. In 2013 and 2014, Huawei’s R&D expenses totalled RMB31,563 million and RMB40,845million, respectively, accounting for 13.2% and 14.2%, respectively, of its total revenue, among thehighest ratios in the ICT industry.
Huawei’s R&D capabilities are also evident from the significant amount of intellectual property that ithas developed. Huawei is the company with the largest number of patents in China, one of the top 50holders of patents granted in the United States and one of the top 10 holders of patents granted inEurope. Huawei has been dedicated to driving the development of LTE standards and filed in 2014, atotal of 665 accepted proposal have been submitted in this area to 3GPP, which is the largest number inthe industry. As at 31 December 2014, Huawei had filed 48,719 patent applications in China and 23,917outside China, of which 38,825 patents have been granted.
Huawei continuously invests in building future-oriented technological advances to stay at the forefrontof the industry. Huawei actively collaborates with other key industry players to define 5G standardsjointly. Huawei co-established the 5G Innovation Centre in the UK and conducts joint research withover 20 top universities. Huawei also pioneers efforts to research and design radio link technology for5G air interfaces in the project METIS. In late 2014, Huawei worked with industry partners to build theworld’s first 5G testbed to accelerate 5G research. By the end of 2014, Huawei had established nine 5Gresearch laboratories with over 300 experts specialising in 5G technology.
A leading ICT solutions provider with global scale and leadership in multiple product segments
Huawei is a global leader in providing advanced ICT solutions and products to carriers, enterprises andconsumers around the world. Huawei’s in-depth understanding of its customers’ specific demands andchallenges allows it to incorporate innovative features into its products and services, customisedaccording to its customers’ needs. Huawei strives to build broader global connectivity. With theaccelerated rollout of 4G mobile ultra-broadband networks, Huawei commercially deployed 174 long-term evolution (‘‘LTE’’) networks in more than 100 capital cities, nine financial centres and 132evolved packet core (‘‘EPC’’) networks worldwide. With its established track record, Huawei has alsoconstructed 186 commercial networks worldwide powered by its 400G core routers to help leadingcorporate customers across the globe take up the challenges presented by the increasingly massive datatraffic.
Over the past 28 years of robust growth, Huawei has developed a diverse and well-balanced productportfolio. In 2014, Huawei had top leading positions in terms of largest market share globally in thefollowing segments:
• No. 1 in network infrastructure in 2014;
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• No. 1 in fixed access in 2014;
• No. 2 in mobile infrastructure in 2014;
• No. 2 in service provider routers and switches and optical transport network in 2014;
• No. 2 in operational technology software in 2014;
• No. 2 in operational technology services in 2014;
• No. 2 in enterprise routers in 2014; and
• No. 3 in smartphones in 2014.
Strong brand awareness with diversified and high-quality customer and supplier base
Huawei’s high-quality customer base is evident in its long-term partnership with leadingtelecommunications carriers in the world. To date, Huawei has established long-term businessrelationships with top telecommunications carriers in the world, such as China Mobile, China Telecom,China Unicom, T-Mobile, Etisalat, Telefónica, SingTel, British Telecom and Vodafone. Huawei hasentered into 5 to 15 year long-term framework supply agreements with a majority of these toptelecommunications carriers. This high-quality customer base has allowed Huawei to expand product andservice offerings and drive revenue growth. It has also given Huawei a considerable advantage inunderstanding market and technology trends to better guide its R&D strategy for future marketdevelopment. Huawei has continually offered training programmes and industry update seminars throughits 45 training centres worldwide to improve the professional skills of customers to remain up-to-datewith changing technology.
Due to the long sales cycle of telecommunications network infrastructure and its need for continuousvendor support during operations, telecommunications carriers generally select their vendors based on astringent and professional certification and audit process to prove their long-term technical and financialviability. Huawei’s brand is known globally to governments, corporations and individual customers. Arecent consumer survey by IPSOS, a market research firm, which covered 32 countries, revealed thatHuawei’s brand awareness rose from 52% in 2013 to 65% in 2014, representing a year-on-year increaseof 25%. In the Chinese market, awareness of the Huawei brand increased to 90%. Huawei is among thetop three brands in terms of Brand Momentum according to IPSOS. Huawei is also the first Chinesecompany to be successfully listed on Interbrand’s 2014 Top 100 Best Global Brands list.
Huawei adopts a multiple-supplier strategy to diversify its sources of supply. For a particular componentthat is available only from one supplier or a limited number of suppliers, Huawei typically enters into aguaranteed product supply arrangement with such suppliers. This gives Huawei the right to receivesupplies on a priority basis and to claim compensation or other remedies if such supplier fails to meet itsquality or quantity requirements. Huawei’s key suppliers comprise well-established global technologyand manufacturing companies, such as Foxconn, Qualcomm, IBM, Microsoft, Matsunichi, O-film, Intel,Broadcom, Hynix, TSMC and BYD.
Experienced and stable management team and highly motivated staff leading to continuousoperational efficiency improvement
Huawei’s success is critically-hinged on the sound leadership and vision of its directors and seniormanagement as well as its highly motivated and proficient staff.
Most members of Huawei’s senior management have been with Huawei since the early 1990s and haveserved Huawei for over 15 years. The average length of service of 23 years provides Huawei with stablemanagement, a continuous platform to drive through management’s initiatives and promotes operationalexcellence. With its well-defined strategy and prudent management, Huawei has navigated through
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various technological reforms, economic cycles and industry developments over 28 years. Huawei’smanagement has strong execution capabilities which successfully led the company to launch, amongothers, a globally leading smartphone business within a short time-frame. The management team is opento learning advanced management systems from other leading companies and to integrating theindustry’s best practices with Huawei’s existing advantages. This enables Huawei to continuouslyimprove its management and operational efficiency. In addition, the management has had the vision toexpand Huawei’s business globally, entrenching Huawei in different local industries in the globalmarkets.
Huawei’s corporate culture and shareholding structure promote innovation and entrepreneurship andHuawei has a highly motivated and proficient professional workforce. Huawei implements an employeeshareholding scheme, under which high-performing employees can make a cash contribution to share inHuawei’s success by receiving dividend and capital appreciation. The scheme effectively alignsemployees’ personal goals with Huawei’s long-term development, fostering Huawei’s continuing success.
In 2014, to encourage Huawei’s employees to strive for excellence, Huawei raised salaries andincentives for field units and high-performers. Huawei fully implemented the ‘‘Contribute and Share’’bonus mechanism. Regarding long-term incentives, Huawei rolled out the Time-based Unit Plan(‘‘TUP’’) globally for all outstanding employees to share in more of the profits of Huawei’s long-termdevelopment. TUP is a profit-sharing and bonus plan based on employee performance for all eligibleemployees (‘‘recipients’’) in the Group. Under TUP, time-based units (‘‘TBUs’’) are granted to therecipients, which entitle the recipients to receive cash incentives calculated based on the annual profit-sharing amount and the cumulative end-of-term gain amount. Both of the annual profit-sharing and theend-of-term gain amount are determined at the discretion of the Group.
Huawei is on LinkedIn’s 2014 list of the World’s 100 Most In Demand Employers. As at 31 December2014, Huawei employed from about 170 countries and regions across six continents, creating a trulyglobal and vibrant working environment.
Global resources with local focus to rationalise cost structure and to successfully penetrate into bothemerging and developed economies around the world
Huawei’s global business has operations in over 170 countries and regions. Huawei fully integrates thebest available resources to build a global value chain which is shared with customers around the worldin order to grow with them symbiotically. Through working with local industry leaders, Huawei fullycombines the advantages of its global value chain with local innovation capabilities, enabling localinnovations amplify their strength to reach the global market. This strategy effectively helps Huawei tosuccessfully penetrate both the developing and developed markets.
Huawei has established 16 R&D centres, over 40 centres of expertise and over 30 shared service centresaround the world to consolidate innovation capabilities and to interact directly with customers indifferent regions. In addition, shared logistics and accounting centres and centralised IT, procurementand production platforms have enabled Huawei to improve operating efficiency while maximisingsynergy among different business groups. Huawei outsources most of its manufacturing needs tocontractors and has a streamlined process for supply, distribution and sales to fully benefit from theeconomies of scale that its global operations bring. Huawei’s European Logistics Centres, for examplethe centre based in Hungary, fully utilises regional resources and covers Europe, Central Asia, theMiddle East and Africa which represent huge growth potential for Huawei’s products and solutions.
Robust credit profile and strong liquidity position supported by prudent risk management
Huawei has experienced continuous growth in its profits and cash flows. Huawei’s operating profitincreased from RMB29,128 million in 2013 to RMB34,205 million in 2014, representing a year-on-yeargrowth of 17.4%. Similarly, Huawei’s cash flow from operating activities grew from RMB22,554million in 2013 to RMB41,755 million in 2014, representing a year-on-year growth of 85.1%. Rising
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profits and strong liquidity reflect Huawei’s efficient cost management and sound business strategies.This strong profitability allows Huawei to comfortably meet its financial obligations and fund growthplans.
Huawei has access to various sources of capital to further support its already strong liquidity position.Huawei has cultivated a long-term relationship with a number of reputable domestic and internationalbanks. As at 31 December 2014, Huawei had obtained committed facilities from syndicated loans ofapproximately RMB35,209 million in aggregate, out of which RMB21,549 million was utilised. Huaweialso participates in the debt capital market and issued CNH bonds with principal amounts of RMB1,000million and RMB1,600 million in 2012 and 2014 respectively. As at 31 December 2014, Huawei had anet cash surplus of RMB49,941 million and an interest coverage ratio of 20.2x24.
Huawei adopts a set of comprehensive policies and guidelines to ensure a prudent and sustainableexpansion of its business. Huawei closely monitors and controls its indebtedness levels and relevantfinancial ratios to lower its risks of defaults through managing the maturity dates of indebtedness leveland currencies. Huawei has set up its Financial Risk Control Centre in London to manage globalfinancial risk and to ensure that its financial operations remain efficient, secure and compliant. Huaweihas also centralised cash management to increase the efficiency of cash utilisation and to lowerfinancing costs.
Strategies
Huawei is committed to strengthening its market position as the leading global ICT infrastructuresupplier and solutions provider through the following strategies:
Focus on ‘‘Pipe Strategy’’ and manage business portfolio with effective growth
Huawei focuses on products, services and solutions for transmitting, processing, storing and presentinginformation as part of its ‘‘Pipe Strategy’’, a core strategy and key area of focus for Huawei. Huaweiwill continue to invest and develop its pipe system to achieve effective growth and long-term returns.
Based on the operational characteristics of its Carrier, Enterprise and Consumer segments, Huaweireorganised its business into three distinct customer-driven groups to deliver innovative, differentiatedand leading solutions in 2011. In order to adapt further to the increasing convergence of IT and CTtechnologies, Huawei established the Products & Solutions department in 2014 to maintain its edge ininnovation through an integrated ICT portfolio.
Huawei intends to further strengthen its market-leading position in the global telecommunicationsindustry by leveraging its diverse and substantial customer base in over 170 countries and regions.Huawei also plans to expand its strategic partnership with key customers in the Carrier Business byproviding a full suite of value-added software and services in addition to network infrastructure toincrease customer loyalty and revenue growth opportunities. Promotion of the continuous evolution ofLTE, strengthening its research in 5G technology and building an enterprise cloud service platform toexplore opportunities with other carriers are some of the operational strategies that Huawei willundertake to build on its present strengths.
A present objective is to expand its Enterprise Business and Consumer Business to a point whereHuawei can leverage its core competency in the Carrier Business to pursue growth and diversification.Huawei intends to optimise its regional organisation and accelerate the pace of delegating authority tofield units.
The growth of Huawei’s products in areas such as smartphones will allow Huawei to build a consumer-centric brand name.
24 See ‘‘Selected Financial Information – Other Financial and Operating Data’’.
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Extend technological leadership through demand-driven innovations sustained by effective processesand management systems
Huawei strives to enhance its presence in key standards-setting organisations worldwide to maintain itsvision and sustain its position as one of the industry leaders on technology evolution. Huawei plans tocontinue investing approximately 10% of its revenue into R&D each year. Huawei’s first-classworldwide R&D network is comprised of 16 strategically positioned R&D centres that can quicklydeliver Huawei’s industry-leading offerings, such as its aesthetics and graphic chip design in France andits microwave technology in Italy, while benefiting from economies of scale. Huawei’s technologicalinnovations are driven by two core principles: customer needs and a relentless exploration into the latesttechnological advancements worldwide. These two core principles underpin Huawei’s execution of asuccessful customer-driven technological innovation framework. Huawei also strives to attract and retainthe best talent, and continuously integrates and optimises transformative projects across differentfunctions, processes and departments at its representative offices.
Continue to enhance operational efficiency through management improvement
Huawei will continue to collaborate with leading consultancies such as IBM, Accenture, the Hay Group,PricewaterhouseCoopers, Fraunhofer-Gesellschaft and Boston Consulting Group to improve managementcapability and efficiency in major elements of Huawei’s operations from R&D to manufacturing,distribution and support. Huawei’s key initiatives include:
• in R&D, enhancing the integrated product development process to improve productivity further andshorten the development cycle. This ensures that technical innovations have clear customerrelevance and can be commercialised in a short period with a reasonable rate of return;
• in sales and services, promoting project-centred operations, and piloting pre-sales and post-salesalignment at the project level. Huawei’s goal is to change from a ‘‘function first, project second’’matrix to a strong ‘‘project first, function second’’ matrix structure. In addition, Huawei willenhance major management processes to ensure that cross-functional sales and service deliveryefforts are properly scheduled to achieve higher customer satisfaction and revenue assurance;
• in supply chain management, continuing to streamline the supply chain management process toenhance cross-platform coordination, maximise cost synergy and ensure increasing cash-flow; and
• in operations, extending its integrated transformation pilot project to other selected countries.Huawei intends to delegate more responsibility and authority to field units to achieve faster andmore efficient customer response and turn-around time. The target for Huawei’s managementtransformation is to achieve ‘‘complete integration within two years’’ in the ICT infrastructurenetwork business, and to lay the foundation for achieving CIAG (Consistency of InventoryAccounts and Goods) within three years and the ‘‘Five Ones’’ (One Network, One Platform, OneProcess, One Team and One SLA Management) within five years. Through central managementand supervision at the back offices while empowering field offices with authority and delegation ofresponsibility, Huawei seeks to further streamline its operational efficiency and maintain quality ofservice.
Implement ‘‘Glocalised’’ operations to fully combine the advantages of its global value chain withlocal innovation capabilities
As a global company that operates in over 170 countries and regions, Huawei integrates the bestresources from around the world to build a global value chain to allow it to successfully penetrate intoboth emerging and developed economies around the world. Huawei’s localised operations will enableHuawei to contribute to socioeconomic development as well as enable local innovations to reach theglobal market. Huawei is committed to being a responsible corporate citizen, an innovative enabler forthe information society and a collaborative industry contributor. Huawei has also established 16 R&Dcentres, over 40 centres of expertise and over 30 shared service centres around the world to strengthen
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innovation capabilities and to directly interact with customers in different regions. Huawei outsourcesmost of its manufacturing needs to contractors and has a streamlined process for supply, distribution andsales to benefit fully from the economies of scale that its global operations bring.
Building strategic alliances, cooperating with industry players and joining standards and open sourceorganisations to establish mutually beneficial collaboration and achieve sustainable industrydevelopment
Huawei strives to build a robust industry ecosystem primarily through three methods, (i) establishingstrategic alliances, (ii) cooperating with industry players and (iii) joining standards and open sourceorganisations.
In terms of establishing strategic alliances, Huawei focuses on collaborating with large industry leadersto develop its differentiated capabilities, which allows Huawei to provide strong and competitivesolutions through joint cooperation, thereby creating increased value for its customers. As an example,Huawei and SAP have launched SAP HANA, an x86 server that uses the SAP HANA in-memorydatabase to improve system performance. Huawei and Accenture have also developed an enterpriseprivate cloud (‘‘EPC’’) solution.
To enhance collaboration with industry players, Huawei has developed and implemented strategies fordriving industry development and integrating into vertical industries. To address new marketopportunities, Huawei has collaborated with partners to develop industry standards, policies, spectrumallocation and end-to-end solutions. At present, Huawei has made significant progress in severalindustry alliances covering eLTE, FusionSphere and millimetric waves. Adhering to its strategy ofintegration, Huawei has sought to integrate with key industries in government, transportation, energyand finance. Huawei has also worked with independent software vendors (‘‘ISVs’’) and systemintegrators (‘‘Sis’’) to develop and sell industry-specific solutions and has further aligned its horizontalinfrastructure solutions with the needs of various industries.
In terms of joining standards and open source organisations, Huawei has made significant contributionsto developing industry standards and building an open source ecosystem and its heavy involvement hasreinforced Huawei’s position as a trusted industry leader. As a result of the fast advancing informationindustry, ‘‘Open Cooperation’’ has become a core strategy of Huawei, which has placed increasingemphasis on such open cooperation with its partners. Working more closely with its partners mutuallyamplifies and complements the strength of Huawei and its partners and creates increased value, buildinga healthy ‘‘win-win’’ ecosystem.
Maintain a prudent and strong risk management policy
Huawei believes that a prudent and robust risk management system can reduce operational risks andhelp achieve long-term sustainable growth. Huawei will continue to implement and enhance a prudentrisk management system with well-defined policies and guidelines in key areas of enterprise risks facingHuawei including, among others:
• stringent legal risk management that emphasises full compliance with legal, regulatory andgovernmental requirements, particularly in countries and regions with higher compliance risks;
• comprehensive operational risk management which allows Huawei to reduce concentration risk inraw materials, technologies, suppliers, countries and currencies, and particularly, strategicinventory buffers for key materials and components to mitigate the risk of supply chaindisruptions;
• systematic measures to control customer credit risk including periodic reviews of each customer’scredit profile based on internally generated credit scores; and
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• well-managed hedging policy, which promotes natural hedges to mitigate interest rate and foreignexchange risk.
Maintain a strong focus on corporate governance
Huawei’s business structure focuses on three dimensions – customers, products, and regions – and hasbeen delegating more authority to the field. Accordingly, Huawei strives to enhance the operations andcapabilities of the board of directors in its major subsidiaries to better supervise compliance with locallaws, regulations, and business practices. At the corporate level, Huawei has a clear strategic goal tobecome the leader in the ICT industry and build a ‘‘Better Connected World’’. Huawei also regularlyevaluates the performance of board of directors members to ensure better guidance for corporate strategyexecution and business operations.
Place cyber security and user privacy protection above Huawei’s business interests
Ubiquitous networks are changing the way the world works and lives. While this presents manyopportunities, it also poses new challenges to global security. Huawei is committed to protectingcustomers’ information assets and user privacy and strives to adopt every possible means to providehigher levels of assurance to ensure the security and stable operations of its customer networks. As partof its corporate social responsibility, Huawei is committed to honouring user privacy protection inaccordance with local laws and regulations. Huawei frequently shares its cyber security managementpractices with all stakeholders, including customers, industry players, governments and the media. Thesepractices include an end-to-end cyber security assurance system, a management approach that is orientedtowards built-in processes and its ‘‘Assume nothing, Believe nobody, Check everything’’ philosophy.
Continue to attract, incentivise and retain employees
Huawei’s success, to a large extent, depends on its employee shareholding scheme. In order to maintainits competitive advantage in the ICT industry, Huawei intends to:
• continue to implement its employee shareholding scheme to motivate highly qualified personnel;
• continue to support and recognise the importance of a market-driven compensation system thatrewards performance and results, including rolling out the TUP as a long-term incentive globallyfor all outstanding employees, especially those at the junior and middle levels, to share in more ofthe benefits of Huawei’s long-term development;
• continue to develop a sound learning and development platform for employees through organisingproduct knowledge and professional skills training, participating in international professionalforums, offering global job rotation opportunities and providing a comprehensive managementskills training system; and
• continue to extend the range of its non-monetary incentives, including commendations such as the‘‘Whiz Kids’’ and the ‘‘Future Stars’’. Huawei provides high-performing employees with access tofast-track promotions in terms of position and job level, providing such employees with moredevelopment opportunities and rewards.
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Products and Services
Huawei’s three principal business segments comprise the (i) Carrier Business, (ii) Enterprise Businessand (iii) Consumer Business. The following table sets forth a breakdown of its revenue by segment andexpressed as a percentage of its total revenue for the years indicated:
Year ended 31 December
2013 2014
(RMB inmillions) %
(RMB inmillions) %
Carrier Business . . . . . . . . . . . . . . . . . . . . . . . . . . 164,947 69.0 192,073 66.6Enterprise Business . . . . . . . . . . . . . . . . . . . . . . . . 15,238 6.4 19,391 6.7Consumer Business . . . . . . . . . . . . . . . . . . . . . . . . 56,618 23.7 75,100 26.1Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,222 0.9 1,633 0.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,025 100.0 288,197 100.0
Carrier Business
Huawei’s Carrier Business is the core strength of Huawei and accounts for a substantial part of Huawei’srevenue. In 2013 and 2014, revenue from the Carrier Business amounted to RMB164,947 million andRMB192,073 million respectively, accounting for 69.0% and 66.6% respectively of Huawei’s totalrevenue.
In a Better Connected World, carriers constantly face pressure from more devices, content, andapplication scenarios. To help carriers address these challenges, Huawei focuses on informationtransmission, processing, storage, and presentation and provides integrated products, services, andbusiness solutions to help carriers build networks capable of delivering an optimal experience and copewith the challenges presented by ICT transformation.
It is Huawei’s general strategy to help carriers build ubiquitous broadband networks that deliver anoptimal experience, operate efficiently, and enable agile business innovation. As carriers’ most trustedpartner, Huawei has empowered carriers to develop the key capabilities required for ICT transformation.These key capabilities include building efficient infrastructure, enabling smart pipes, aggregating digitalcontent, opening up networks, exploring vertical industries, and conducting ICT-oriented architecturetransformation. In the future, Huawei aims to help carriers bring more value to end users in a BetterConnected World in the future.
Wireless Networks
With large-scale worldwide LTE deployment, Huawei steadily expanded its presence in the global LTEmarket, having also commercially deployed 174 LTE networks and 132 EPC networks for carriers. LTEnetworks constructed by Huawei now serve approximately half of all LTE subscribers around the world.
In China, Huawei has become the most important strategic partner of China Mobile, China Telecom, andChina Unicom in the area of LTE construction.
Huawei maintained its leadership position in the Universal Mobile Telecommunications System(‘‘UMTS’’)/High Speed Packet Access Plus (‘‘HSPA+’’) market and deployed a total of 304 commercialUMTS networks worldwide, accounting for 53% of the world’s total. Out of these, 123 were upgraded to42 Mbit/s Dual Carrier HSPA+ networks. During the development of 700 MHz, 450 MHz, and 3.5 GHz,Huawei partnered with carriers, device and chip makers, and research institutes to establish industryalliances that promote the healthy and sustainable development of the entire mobile industry. Huaweiproposed the first 4.5G solution for smooth LTE evolution, which raised network speed and connectionsand shortened latency. The solution is expected to be commercially deployed in 2016.
Mobile connectivity has shattered the limits of time and space and is changing the way people work andlive. New operating models have been created for traditional industries. Mobile office, mobile shopping,and mobile payments have become part of everyday life. Mobile IoT will be the next step in the
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evolution of mobile broadband. 5G is not just the next-generation mobile communications standard after4G; it also represents the basic framework for the future digital world. Huawei has developed globalpartnerships with multiple research institutes, universities, and carriers, and plans to start to deploycommercial 5G networks in 2020.
Fixed Networks
With the development of cloud computing, IoT, and 4K video industry chains, the fixed broadbandindustry has entered a new round of rapid development. Carriers have put full-service operations, 4Kultra-HD video, and SDN at the core of their business strategies. Globally, fixed broadband has becomea focal point for investment in the ICT industry.
In the construction of ultra-broadband networks, full-service operations featuring Fixed MobileConvergence (‘‘FMC’’) have become a business strategy for many carriers and end users seek aninspired experience. As a result, carriers have not only improved their competitiveness and customerloyalty, but also achieved sustainable and profitable growth through content control.
In the face of future trends, Huawei achieved the following in the SDN field. It:
• joined forces with industry partners to establish SDN alliances. This aims to accelerate the processof translating SDN technologies into commercial applications, advance research on SDNtechnologies, drive industry development, and build integrated interoperability test platforms formulti-vendor interoperability testing.
• led commercial SDN application efforts. For example, Huawei partnered with China Telecom tocomplete the world’s first commercial deployment of carrier SDN in Beijing and Transport-SDN(‘‘T-SDN’’) in Fujian. Huawei also worked with leading carriers such as Telefonica to jointly drivethe application of SDN in multiple scenarios such as mobile bearer networks, data centres,backbone networks, and smart pipes for Metropolitan Area Networks (‘‘MANs’’).
Huawei was rated as the top supplier for SDN and NFV solutions for the second consecutive year byworld-leading carriers in a 2014 survey conducted by the consulting firm Current Analysis and selectedas the Best T-SDN Solution Supplier in 2014. Huawei’s virtual Data Centre (‘‘vDC’’) solution also wonthe award for Best Virtualisation Innovation at the Broadband InfoVision Awards, which was part of theWorld Broadband Forum 2014.
In 2014, Huawei’s innovative fixed network products and solutions as well as outstanding servicesgained recognition from more customers from around the world. Huawei has constructed 186commercial networks powered by its 400G core routers, becoming the world’s largest supplier forcommercial 400G core routers.
Global Services
Huawei continued to increase investment in developing its capabilities in service solutions andplatforms, having already established complete local service delivery organisations and platforms aroundthe world.
The HUAWEI SmartCare® Customer Experience Management (‘‘CEM’’) solution delivered verifiablebusiness value to carriers in the areas of service quality management and customer experience analysis.Huawei actively participated in setting industry standards for CEM. Specifically, it was involved indeveloping 531 KQIs relating to customer experience at the TM Forum, and in setting the baseline valuefor indicators at the QuEST Forum. In 2014, Huawei’s Consistency of Inventory Accounts and Goods(‘‘CETC’’) won the award for CEM Innovation of the Year from Telecom Asia.
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In the managed services domain, Huawei is committed to maximising network efficiency for customers.Huawei increased investment in the Managed Services Unified Platform (‘‘MSUP’’) and Global NetworkOperation Centers (‘‘GNOCs’’), and expanded the delivery scope of centralised and standardisedservices. While continuing to improve its global O&M efficiency and quality, Huawei helped carriersachieve operational excellence.
Huawei’s Quality Brand Mobile Broadband (‘‘MBB’’) solution continuously improves capabilities inprecise planning and optimisation. In 2014, the Quality Brand MBB solution helped more than 100networks worldwide significantly boost their rankings in network quality, service quality, and branding.By the end of 2014, Huawei had provided mobile network planning and design services for more than500 carriers worldwide with its mobile network integration services. For Huawei’s In-building Solution(‘‘IBS’’) integration services, it had constructed more than 32,000 hotspots for 117 carriers in 65countries. A total of 45 of the world’s top 50 carriers have adopted our site integration services.
With the rapid development of video services, the bandwidth requirements of fixed networks areexpected to increase by eight to ten times over the next five years, which means tremendousopportunities for the development of Huawei’s fixed network integration services. In 2014, Huawei’sfixed network integration services covered 186 400G networks around the world. With its customersupport services, Huawei provided secured, reliable, and efficient network assurances to customers inmore than 170 countries, serving one-third of the world’s population. Also, in 2014, Huawei providedassurances for more than 150 major global events such as Hajj and the 2014 World Cup in Brazil.Moreover, Huawei offered carriers in 149 countries training services to help them boost theircapabilities.
In 2014, Huawei experienced rapid growth in IT consulting and system integration services and has:
• utilised its data centre integration services to help customers across the globe construct more than480 data centres, and provided data centre consolidation and service migration services, enabling itto achieve rapid growth in data centre integration services;
• provided IT managed services to more than 20 carriers across the globe, widely demonstratingHuawei’s capabilities in this domain industry-wide;
• won a framework contract from Telefonica for OSS services;
• became a major partner of the TM Forum (formerly known as TeleManagement Forum and theNetwork Management Forum) for developing Operations Support System (‘‘OSS’’) standards forthe Zero-touch Orchestration, Operations and Management (‘‘ZOOM’’) project;
• named the Asia-Pacific Business Support System (‘‘BSS’’)/OSS Vendor of the Year in 2014 byFrost & Sullivan; and
• collaborated closely with industry organisations in the NFV/SDN integration domain to build upmulti-vendor integration and network evolution capabilities and help develop a sound industryecosystem. In 2014, Huawei successfully helped a world-leading carrier construct the industry’sfirst commercial Voice over Long Term Evolution VoLTE office, acting as the prime NFVintegrator for the project.
Carrier Software
As the telecom industry continues to develop, Huawei centres on the management of carriers’ customerassets and two business domains: digital services and operations support. Huawei developed integratedsolutions including Value Growth Solution (‘‘VGS’’), Machine-to-Machine (‘‘M2M’’), Universe, andCustomer Value Management (‘‘CVM’’) to create value for customers by leveraging the marketopportunities arising from carriers’ digital transformation.
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In the digital service domain, the Huawei Digital inCloud solution provides a unified Partner AllianceProgramme and an open platform to help carriers build a digital ecosystem, accelerate the transformationof their digital services, and support Huawei’s partners’ business success. In 2014, Huawei’s ServiceDelivery Platform (‘‘SDP’’) solution helped carriers achieve business success in areas likecommunications, charging, Big Data, and traffic trading. Huawei’s digital home services focus on video,and improved its core competencies in multi-screen experience, video distribution, and devices. They arewidely adopted in the high-end markets in Europe and Latin America. Huawei’s VAS Cloud solutionhelped carriers transform their service networks and develop NFV architecture. The solution was widelydeployed by top carriers for their high-value subsidiaries. Huawei became the industry leader inintegrating service networks and opening up communications capabilities. As the cornerstone oftransforming carriers’ traffic monetisation strategy, VGS – service control gateway (‘‘SCG’’), continuedto improve user experience and network efficiency and support traffic monetisation.
In the BSS domain, Huawei built up digital operation transformation capabilities and the next-generationoperation enabling platform. By opening up telecom operation capabilities and monetising data assets,Huawei expanded its operation ecosystem and customer base, and offered the ROADS (‘‘Real-time, On-demand, All-online, DIY, and Social’’) customer experience. Huawei’s BSS solution increased itsglobal market share. Huawei’s Convergent Billing Solution (‘‘CBS’’) served 1.5 billion subscribersglobally, with 320 million subscribers migrated in 18 months. Huawei’s next-generation CBS R5 won 34commercial contracts, maintaining its leadership position in the industry. The Huawei Customer Care &Customer Relationship Management (‘‘CRM’’) system served 800 million subscribers in the globaltelecom market and 15 new commercial contracts were signed in 2014, which consolidated Huawei’sleading position in the market. Huawei’s Next Generation Business Support System (‘‘NGBSS’’)solution contributed to operational transformations, helping carriers achieve business success in BSSnetwork modernisation.
In 2014, Huawei fully utilised its advantages in coordinating pipes with the two areas of the carriersoftware domain: digital services and operations support. Moreover, Huawei developed integratedsolutions for customer asset management. Huawei’s MBB VGS spearheaded the monetisation of themobile broadband traffic, serving carriers in West Europe, the Southern Pacific, China, and LatinAmerica through new business models. Huawei also worked with carriers across the globe to effectivelyexplore and develop – among other areas – Big Data, M2M, and CVM. The Universe Big Data analyticsplatform is commercially deployed in over 10 sites worldwide. It won the award for Most InnovativeTool for Driving Real-Time Intelligence at the Broadband Traffic Management & Telco Big DataSummit.
Huawei’s M2M platform solution was commercially verified at multiple sites. It helps carriers rapidlyexpand their M2M subscriber base.
Core Networks
To face a new wave of transformation in the ICT industry, Huawei’s efforts in the core network domainfocus on evolution towards 4G converged communications, NFV, and convergent data to meet carriers’fundamental needs. By improving users’ communications experience, opening up communicationscapabilities, and moving network infrastructure to the cloud, Huawei helps carriers with theirtransformation towards future networks.
In the IP multimedia subsystem (‘‘IMS’’) and circuit switched domain, Huawei implemented a numberof initiatives. It:
• pioneered in the areas of VoLTE/VoWiFi, NFV, IMS-based fixed network modernisation, andnetwork capability exposure;
• delivered a complete set of solutions ranging from network technology to integration services;
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• provided support for 35 VoLTE networks across the globe, and became the strategic partner ofmany world-leading carriers in 2014;
• enabled Hong Kong’s PCCW-HKT to become the first carrier to commercially deploy VoLTE withthe Enhanced Single Radio Voice Call Continuity (‘‘eSRVCC’’) solution;
• received the award for Best VoLTE Product at the 2014 IMS World Forum;
• received recognition as the Top-Notch Session Border Controller (‘‘SBC’’) for its SE2900 byMiercom – a global leader in performance and security product testing in the US; and
• provided the world’s only convergent signalling solution that supports DRA/STP/SSR withHuawei’s SPS. This solution helps carriers construct stable and reliable 4G signalling networks andensures smooth evolution of traditional signalling networks.
Besides supporting the development of mobile networks, Huawei’s core networks also plays animportant role in modernising fixed networks. With its leading IMS-based Fixed Network Modernisationsolution, Huawei provides carriers’ fixed networks with equipment upgrade and reconstruction services,helping them reduce operating costs, improve network efficiency, transform towards future networkarchitecture, and increase revenue.
In the NFV domain, Huawei continues to play an important role in standards and open sourceorganisations. Huawei works with world-leading carriers and partners to keep driving industrydevelopment. In addition, Huawei builds cloud-aware architectures to help carriers reduce operatingcosts, accelerate service launch, speed up business innovation, and jointly create a favourable ecosystem.Huawei has deployed the world’s first Cloud IMS commercial network based on NFV architecture inEurope, and provides cloud-based IMS/VoLTE services for multiple world-leading carriers.
In the convergent data domain, Huawei achieved accomplishments in the following fields. It:
• became the industry leader in user data management and unified policy control solutions, andsteered industry development and built the digital ecosystem in the areas of Big Data and IoTconnectivity;
• delivered 3.9 billion lines of its Single-SDB solution by the end of 2014, providing secure andstable services for one-third of the world’s population, and worked with world-leading carriers toinnovate in the area of SDM;
• achieved rapid growth with its SmartPCC solution in 2014. According to a survey by Infonetics,Huawei’s Policy and Charging Rules Function (‘‘PCRF’’) solution was carriers’ top choice. TheSmartPCC solution retained the highest market share globally according to Infonetics, and rankedfirst in terms of technology influence according to Current Analysis;
• ranked first in terms of technology influence according to Current Analysis;
• ranked first in terms of technology in carriers’ data assets with Huawei’s DaaS solution, a keycomponent of Huawei’s Big Data portfolio. With Open Data Bus, this solution gains insights intoUser Profile, ensures data openness management and security, and protects privacy, helpingcustomers reduce operating risks and significantly increase revenue. The solution has beensuccessfully deployed in the Big Data project of China Unicom Shanghai. Huawei also jointlyinnovated with Telkomsel in Indonesia to promote the mature commercial application of Big Datatechnologies; and
• helped over 300 carriers worldwide with its convergent data solutions, and developed convergeduser data solutions in the fully-connected era.
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These efforts were aimed at helping carriers monetise user data by fully converging databases, adoptingunified control policies, and improving data security and openness, to satisfy user expectations on aninspired experience.
IT
With convergence as its IT strategy and cloud computing as a strong catalyst for IT and CT restructuringand convergence, Huawei focuses on cloud data centre solutions to help carriers reshape their ICTbusiness and operating models.
Huawei has greatly improved its IT products and solutions, which have been extensively adopted bycarriers from around the world. Huawei’s innovative, differentiated, and leading IT products andsolutions are increasingly recognised by its customers. By December 2014, Huawei had helpedcustomers across the globe build more than 480 data centres, including 160 cloud data centres.
Huawei released its unique IT and CT convergence solutions in the following areas: cloud-baseddevelopment of telecom services, public cloud, and cloud data centre integration. These solutionssuccessfully helped the world’s top 50 carriers achieve ICT transformation using cloud data centres.Based on Huawei’s distributed cloud data centre architecture, China Telecom, through its internationalpublic cloud project, built a resource pool that covered more than 20 countries and regions, and realisedcentralised management on its global resources.
Huawei worked with more partners in promoting the healthy development of the industry chain. It:
• cooperated with Red Hat to develop OpenStack-based cloud solutions to meet carriers’requirements for NFV;
• actively promoted OpenStack’s global development based on its position as a gold member andstrong supporter of the organisation;
• conducted cooperation with the IT hosting leader LeaseWeb, focusing on joint server innovation;and
• helped expand the membership of the Huawei-initiated FusionSphere user alliance to 150, bringingtogether strong players from the cloud computing industry chain.
In the future, Huawei will focus on cloud computing and Big Data technologies. Through continuousinnovation and mutually beneficial partnerships, it will work with carrier customers to embrace the trendof Internetisation and market challenges from over the top, comprehensively optimise and restructuretelecom services, and transform digital services.
Network Energy
Based on the profound understanding of ICT domain and customer’s demands and requirements, Huaweiprovides a full range of network energy solutions, including telecom energy, data centre energy, boardmounted power and customised power and inverter. Huawei Network Energy is dedicated to providinghigh-efficiency, high-reliability and seamless evolution energy solutions for carrier and industrycustomers and protecting their investment in the long term.
MBB/fixed broadband (‘‘FBB’’) and cloud computing have resulted in network traffic surges, a dramaticincrease in data volume, and the need to conserve energy and reduce emissions. By keeping pace withthese trends, Huawei leveraged its advantages in ICT and network energy, and integrated IT withelectricity and electronics technologies. Acting on the innovative concepts of digitalisation,interconnection, and intelligence, Huawei focused its energy solutions on telecom energy, data centreenergy, and smart PV plants to develop simple, efficient, and reliable intelligent network energysolutions.
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With the rapid development of MBB/FBB, Huawei launched the MTS new-generation intelligenttelecom energy solution to meet carriers’ requirements for easy site acquisition, minimal maintenance,high energy efficiency, and easy management. With software-defined power and modular designs, thissolution supports integrated deployment, site-level efficiency, and intelligent management of telecomsites. Huawei deployed more than 1.6 million telecom energy systems in 170 countries and regions, andenjoyed the largest share in the global incremental market.
Huawei has entered the US, Australian, Japanese, and South Korean markets. Huawei’s products arehighly energy efficient; for example, Huawei’s rectifier module has an efficiency of up to 98%, rankingtop in the industry. In 2014, Huawei won the 2014 Frost & Sullivan Global Product Leadership Awardfor the Direct Current (‘‘DC’’) Power Systems Market.
In the area of energy consumption, Huawei established partnerships with leading carriers such as ChinaMobile, China Telecom, China Unicom, China Towercom, Telefonica, Vodafone, BT, KPN, KDDI,STC, and Etisalat. By improving energy and operating efficiency, Huawei helped minimise customers’end-to-end operating costs. Telefonica named Huawei exclusively as their Best Energy Partner.
The explosive growth of Internet applications and cloud computing has brought data centres into a newround of development, requiring shorter construction periods and lower power consumption. Huawei hadmany achievements with data centres in 2014:
• Huawei’s Intelligent DC solution addressed difficulties in the planning, construction, and O&M ofdata centres, and maximised return on investment and operating efficiency.
• Huawei partnered with world-leading carriers to deploy data centres on a large scale to meet theincreasing requirements of the ISP industry for IDC.
• Huawei’s Intelligent DC solution won multiple awards, including the award for Outstanding DataCentre Solutions.
• Intelligent DC solution won multiple ranked first globally in terms of shipments in 2014, and wonthe award for Data Centre Innovation of the Year from Telecom Asia.
• Huawei delivered a container data centre for Telenor in Myanmar, which became the world’s firstlarge outdoor data centre.
Huawei also provides a full range of efficient, high-frequency modular UPS products to meet the needsfor uninterruptible small-, medium- and large-capacity power supply. In 2014, Huawei won the largestshare in China Mobile’s centralised procurement of Uninterruptible Power Supply (‘‘UPS’’) products.Huawei’s UPS product penetrated high-end industries across the globe on a large scale, including thetransportation, finance, and government sectors.
Huawei launched its Smart PV Plant solution by integrating information, Internet, and photovoltaictechnologies to address customer needs. This solution ensures efficient power generation, smart O&M,security, and reliability in PV plants full lifecycle. In 2014, Huawei achieved the following:
• Huawei’s Smart PV Plant solution was deployed on a large scale globally, steering industrydevelopment.
• Huawei’s commercial products led the industry in terms of both efficiency and power generationcapacity.
• Huawei was the first vendor in the world to pass undervoltage ride through tests at power plants.
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• Huawei teamed up with Yellow River Upper Reach Hydropower Development, a subsidiary ofChina Power Investment Corporation, and constructed the world’s largest cutting-edge smart PVplant with a capacity of 130 MW.
• Huawei established partnerships with China’s top 50 PV plants and made inroads into Europeanand Japanese markets.
Huawei believes that its efforts have provided strong support for customers’ business success and thelarge-scale adoption of clean energy.
Enterprise Business
Huawei’s Enterprise Business Group offers a wide range of Enterprise ICT solutions and related servicesthat cater to the networking, communication, computing and storage requirements of global verticalindustry and enterprise customers across government and public sectors, finance, transportation, energy/power, communications/media and SMBs worldwide. Each of these verticals has unique ICTinfrastructure requirements ranging from robust security to strong wireless expertise as sources ofcompetitive differentiation.
Huawei’s strategy for Enterprise Business is centered around a business-driven ICT infrastructure(‘‘BDII’’) approach, which focuses on close cooperation and joint innovation with partners in the areasof technology, hardware, software and services to deliver customer-centric ICT solutions and services.Enterprise offerings are broadly segmented across the domains of enterprise networking, cloudcomputing and data centre (including servers and storage solutions), UC&C and enterprise infrastructureservices.
In 2013 and 2014, revenue from the Enterprise Business amounted to RMB15,238 million andRMB19,391 million, respectively. By the end of 2014, Huawei had more than 6,000 channel partnersand 300 solution partners supporting the Enterprise Business worldwide.
Enterprise Networking
Huawei’s enterprise networking business offers a wide range of networking products and solutions,including Enterprise routers, Ethernet Switches, WLANs, access equipment, Network Security Gateways,agile controllers as well as related applications and software.
Huawei’s share in the traditional enterprise router market was ranked by Gartner25 as the second-largestworldwide in 2014. In 2013, Huawei was selected by Technology Business Research as the fastest-growing company in the global data centre networking market for the second year. According tostatistics released by IDC in 2013, Huawei ranked first in the combined firewall and UTM market inChina.
According to statistics released by IDC, Huawei ranked No. 3 globally in the Ethernet Switch marketand No. 2 in Routers in 2014.
Huawei’s enterprise networking products and solutions have been deployed in numerous large projectsglobally across various key industry verticals. Below are some highlights of Huawei’s recent successesin specific industry-vertical domains:
• Transportation: Huawei’s Digital Railway Solution has now covered a total length ofapproximately 87,000 km of railway globally, equivalent to twice the circumference of the Earth.In China, Huawei has helped Shuo Huang Railway operate 25,000 ton heavy-haul trains. Outsideof China, Huawei has partnered with Bombardier to deploy Africa’s first ERTMS Regional railwayin Zambia and joined Alstom in completing the live testing of the Communication-based Train
25 Gartner ‘‘Market Share: Enterprise Network Equipment by Market Segment, Worldwide, 4Q14 and 2014’’ 24 March 2015.
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Control (‘‘CBTC’’) system powered by LTE. Zhengzhou Metro Line 1 is the world’s first urbanrail transit line to adopt 4G LTE technology. Huawei’s eLTE broadband trunking solution providedthe Passenger Information System and vehicle-mounted video surveillance services on this line.Huawei’s GSM-R solution has been widely deployed by customers in Russia, South Africa,Turkey, Morocco and Serbia.
• Government/Public Sector: Huawei’s Smart City, e-Government, Emergency Command,e-Education and Healthcare solutions have been integrated by more than 200 partners andsupported 64 key projects worldwide including China’s National e-Government Network. Huaweihas worked with partners to develop the Safe City Solution by leveraging the next-generationeLTE mobile broadband trunking system and visualised command platform. This solution has beenwidely applied to more than 100 cities globally.
• Energy: In the energy domain, Huawei has served 14 of the world’s 20 largest energy companies(including China’s State Grid), covering more than 100,000 substations and 38,000 km of oil andgas pipelines. In 2014, Huawei’s fully connected grid solution helped the Provincial ElectricityAuthority of Thailand construct high-speed and secure production networks, ensuringcomprehensive construction of smart grids.
• Finance: Huawei’s Omni-Channel Banking Solution has been put into commercial use in more than300 financial services organisations around the world, including Standard Chartered, Hang SengBank of Hong Kong and Sberbank (Russia’s largest commercial bank). Huawei’s enterprisenetworking solutions have been successfully deployed on a large scale by the Industrial andCommercial Bank of China, Agricultural Bank of China, Bank of China and China ConstructionBank.
• Other examples of Huawei’s enterprise solution deployments include supporting the backbonenetwork of Alibaba, Borussia Dortmund Stadium in Germany, IB-RED wireless network servicesin Spain and Baidu’s Data Centre. Huawei’s carrier firewalls have been applied in backbonenetworks of most of the world’s top 50 carriers, including China Mobile, T-Mobile and Telefónica.Huawei’s Agile Network solutions have now been selected by approximately 500 enterprisesworldwide.
BYOD has become a widely accepted working style for enterprises. With its partners, Huawei has builtmobile platforms featuring rich applications and now promotes the highly secure one-stop BYODsolutions. These solutions have been adopted by large enterprises such as Haier Group, financialservices organisations such as China Minsheng Bank as well as educational institutions such aseducation bureaus in South Africa.
Cloud Computing and Data Centre
This segment includes Huawei’s broad range of high-performance Server and Storage product lines aswell as integrated Cloud Computing and Data Centre Infrastructure solutions.
Featured offerings include the industry’s first distributed cloud data centre solution (FusionCloud) andthe industry’s first enterprise-class Big Data analytics platform (FusionInsight). Huawei was positionedas a challenger in the Magic Quadrant for Contact Centre Infrastructure26. Huawei was listed inGartner’s magic quadrants for x86 Server Virtualisation Infrastructure27.
26 Gartner ‘‘Magic Quadrant for Contact Centre Infrastructure’’ Drew Kraus et al, 22 May 2014.Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advisetechnology users to select only those vendors with the highest ratings or other designation. Gartner research publicationsconsist of the opinions of Gartner’s research organisation and should not be construed as statements of fact. Gartnerdisclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability orfitness for a particular purpose.
27 Gartner ‘‘Magic Quadrant for x86 Server Virtualization Infrastructure’’ Thomas J. Bittman et al, 2 July 2014.
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Huawei’s converged storage products range (blending SAN/NAS features and HDD/solid-state drives)can cater to a wide range of small/mid-range and large enterprises across Big Data, vertical industry andcloud storage applications.
To date, Huawei has built more than 480 data centres for customers worldwide. Huawei’s storagesolutions and server products have been deployed in over 100 countries. Huawei has become a storagepartner of Vodafone, University of California at Santa Cruz, CSS Insurance of Switzerland, Industrialand Commercial Bank of China, China Construction Bank and Agricultural Bank of China. By the endof 2014, more than 700,000 Virtual Machines (‘‘VMs’’) were running on Huawei’s virtualisationproducts. Huawei’s server shipments ranked No.4 globally for five consecutive quarters28.
Committed to building an open, innovative ICT ecosystem, Huawei has actively cooperated withpartners such as Accenture, Intel, SAP and Telefonica in the areas of cloud computing and Big Data.Huawei has also become a major contributor to the open source organisation OpenStack.
Below are some highlights of Huawei’s recent successes in specific industry-vertical domains:
• Finance: Huawei’s Big Data Solution was adopted by China Merchants Bank and Industrial andCommercial Bank of China, helping them carry out precision marketing in the Internet era.Huawei’s server and storage products were deployed on a large scale by Industrial and CommercialBank of China, Agricultural Bank of China, Bank of China and China Construction Bank.
• Internet: Huawei has constructed an efficient and secure cloud platform for Qwant, France’s topsearch engine company and built a highly cost-effective hosting platform for Leaseweb in theNetherlands. Huawei has also helped Taobao manage e-transactions history during the onlineshopping spree on Singles’ Day, a day when Chinese e-commerce companies hold huge onlinesales promotions. Huawei’s products and solutions have been deployed by more than 90 Internetcompanies and data centre cloud service providers.
• Energy: Huawei’s Data Centre Network Solution assisted CNPC in constructing the largestenterprise cloud data centre in the Asia Pacific region, meeting its requirements for ‘‘three datacentres at two cities’’ data disaster recovery and redundancy backup.
• Media/Entertainment: Huawei’s Omnimedia Solution has been extensively deployed by about 200media institutions from 15 countries, including China, France and Italy. Huawei worked withSobey Digital Technology Co., Ltd. to apply an industry-first service-defined omnimedia cloudsolution to the converged press centre of Shenzhen Media Group (‘‘SZMG’’), helping SZMGachieve a strategic transformation towards omnimedia. The HD Programme Production Solution,which is built on Big Data storage and Agile Network, has been put into commercial use on amassive scale in many well-known media groups such as Phoenix TV, Television BroadcastsLimited (‘‘TVB’’) of Hong Kong, Macau Asia Satellite Television Company and HunanBroadcasting System.
• Government/Education: Huawei’s Elastic Education Cloud Solution has been applied to more than20 countries and regions. The Smart Campus Solution helped more than 50 universities such asTsinghua University enhance their teaching and research with more innovative ICT technologies.
Unified Communications and Collaboration
Huawei offers a comprehensive suite of telepresence, videoconferencing, UC and contact centresolutions designed for real-time interaction and decision making. These multi-feature products/solutionshave wide applications for enterprises requiring intensive interaction and efficient collaborative officeservices, as well as niche industries such as telemedicine, distance education, remote banking and trafficsurveillance.
28 Gartner ‘‘Quarterly Statistics: Servers, Worldwide, 4Q14 Update’’ 2 March 2015.
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Huawei’s UC&C solutions have now been put into commercial use in more than 60 countries andregions on a large scale and entered developed markets such as Europe and North America. Thesesolutions serve a large number of industry customers worldwide, including ICBC, Saudi Aramco,Ministry of Education of Uzbekistan and Wing Lung Bank. The ICBC UC system is regarded as abenchmark for development of UC systems in the Chinese banking industry.
Huawei’s contact centre solutions are a leader in the global multimedia contact centre market, with asegment presence for more than 20 years. These end-to-end solutions feature large capacity, highreliability and multiple channels to transform enterprises into high-value customer services andmarketing centres. As an example, the IPCC solution deployed by China Merchants Bank helped ittransform from simple financial advisory service into a remote banking centre and from a cost centre toa profit centre. The three project sites have a total of 2,500 agents, which provide top-notch bundledservices to more than 60 million customers in retail and wholesale banking.
Enterprise Services
Huawei provides converged ICT service solutions for the enterprise market, covering the entire networklifecycle. It includes technical consulting, network planning, network design, deployment, technicalsupport, network optimisation, as well as technical and pre-sales training and certification. By the end of2014, Huawei had more than 1,200 certified and authorised service partners.
Huawei has established a global ICT training and certification programme, which includes Huawei’s in-house training centres, authorised training partners and education projects with more than 30universities. Under the programme, Huawei offers channel partners service certification, authorisation,enablement, incentives and all-around service support. Approximately 20,000 people so far have passedHuawei’s certification programme and received a certificate. The number of Huawei CertifiedInternetwork Experts (‘‘HCIEs’’), the highest technical certification offered by Huawei, has reachednearly 500.
Huawei also partners with more than 20 leading global carriers including Vodafone Global Enterprise,Deutsche Telekom and BT Global Services to provide ICT services to enterprise customers.
Consumer Business
Huawei offers a wide range of models of consumer devices that are designed to provide a smarter andsimpler user experience for individuals, homes and businesses, including smartphones, mobile broadbanddevices and home devices. Huawei’s Consumer Business targets retail customers who look forentertainment, communications and information experiences through using these devices.
In 2013 and 2014, revenue from the Consumer Business amounted to RMB56,618 million andRMB75,100 million, respectively. The 32.6% year-on-year increase in the Consumer Business’s revenuein 2014 was primarily due to the rapid sales growth of Huawei’s smartphone business.
Mobile Phones
Huawei offers a wide range of models of smartphones that integrate communications, multi-mediacapabilities and mobile computing capabilities. In 2011, Huawei switched to develop its own brand withmid-range and high-end handsets. In 2012, Huawei transformed its brand, products and channels, andfirmly implemented the premium product strategy by launching flagship smartphones, including the Dand P series. In 2013, Huawei’s smartphone business experienced phenomenal growth, led by itsflagship devices such as the Ascend P6 and Ascend Mate. In 2014, with the rapid development of 4GLTE in which Huawei has core patent rights, its Consumer Business captured unprecedentedopportunities and has performed well in terms of revenue and profits.
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Huawei’s smartphone shipment in 2014 reached 75 million units29, representing an annual increase of45% as compared to 2013. According to a report by Strategy Analytics, by the end of 2014, Huawei wasthe third-largest producer of smartphones based on units shipped with a global market share of 5.8%.Huawei P7 and Honor 6, two of Huawei’s premium flagship products, achieved global shipment of 4million and 3 million units, respectively, only six months after they were launched in 2014. HuaweiMate7 was also overwhelmingly well-received by business executives in all markets, with a totalshipment of 2 million units being delivered in the first three months after the launch in 2014. Totalshipment of Honor devices reached approximately 20 million units in 2014. The Honor brand iscurrently distributed in more than 60 countries and regions around the world.
Major smartphone models of Huawei that have gained wide market recognition include:
• Ascend Mate 7: Launched in November 2014, Ascend Mate 7 is the first smartphone powered byHuawei’s Hisilicon eight-core Kirin 925 chipset, with Android 4.4 operation system, 3GB RAMand 32GB ROM. Its 6-inch screen with 1920 x 1080 pixels display allows users to view videosand play games at a comfortable size and high resolution. With the high-end dual cameras, front5.0 MP, black 13.0 MP with flashlight auto focus, Ascend Mate 7 is perfect for enhanced videorecording. Compatible with a wide range of network spectrums worldwide, Ascend Mate 7 usessmart antenna switching to intelligently detect the strongest signal, choosing the ideal source foremission or reception of data. Featuring Category 6 4G LTE technology and a download rate of upto 300 Mbps, Ascend Mate 7 is able to download a full-length HD movie in seconds.
• Ascend P7: Launched in June 2014, Ascend P7 is a smartphone with a 6.5mm slim body with aglass back and a 5 inch FHD In-cell LCD display (1920 x 1080). The Ascend P7 has a 13MP BSIcamera with F2.2 aperture and an 8MP BSI front facing camera with auto face enhancement. It hasa 1.8GHz quad-core processor with 2GB RAM and 16GB ROM and supports 4G LTE CAT 4 andDL 150Mbps. The Ascend P7 utilises a 2500mAh high density battery with ultra power-savingmode. The Ascend P7 was awarded the ‘‘European Consumer Smartphone 2014-2015’ award bythe European Imaging and Sound Association.
• Honor 6 Plus: Launched in December 2014, Honor 6 Plus is powered by Huawei’s Hisilicon Kirin925 eight-core chipset, with 3GB RAM and 32GB ROM and supports Micro SD up to 128GBextended. Honor 6 Plus has a built-in 3600mAh Battery that supports reverse charging functionand can serve as ‘‘Charge Pal’ to charge other phones. Honor 6 Plus is equipped with a 5.5-inchFull HD 1920 x 1080 IPS display, with a 78.2% display-to-panel ratio. The Honor 6 Plus LTEmodel supports NFC, making various NFC support programs functionable in China. Honor 6 Plususes dual parallel front 8.0 MP and back dual 8.0 MP BSI cameras.
• Honor 6: Launched in August 2014, Honor 6 is a smartphone with a JDI 5.0-inch FHD Incellscreen (1920 x 1080) and pixel density of up to 445 PPI. The Honor 6 has a 3GB LPDDR3 largememory, 16GB/32GB eMMC storage capacity of the fuselage, with maximum support of 64G SDcard expansion. It has a set of high-end dual cameras, with a rear 13.0MP Sony fourth generationBSI stack type camera, F2.0 large aperture, 5-piece ISP lens and BSI sensor (equipped with dualLED flash) and a front 5.0MP front camera.
Mobile Broadband Devices
Huawei is the global leader for mobile broadband devices and has maintained a leading market share. In2014, global shipments of Huawei’s mobile broadband devices reached approximately 33.3 million sets.
Huawei focuses on developing innovative features in its mobile broadband devices that provide fasterconnectivity, a higher degree of convenience and better energy efficiency. In December 2013, Huaweilaunched the world’s first pocket router with the world’s fastest 3G wireless router for that time, with
29 Based on Huawei’s internal record, the smartphone shipment in 2014 reached 75 million units.
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downlink rates of up to 42Mbps and with other features such as the capability to switch easily betweenwired network and WiFi, high 5200mAh portable mobile power, a continuous working time of up to 16hours and a standby time of up to 500 hours. In 2014, Huawei released the world’s first LTE Cat-6Mobile WiFi with a downlink speed of up to 300Mpbs and hotspot access for 10 devices. Leveraging onits distinctive technology advantages, Huawei shipped over 19 million LTE-enabled devices in 2014.Huawei also made strategic investments into smart wearables and smart home domains. Huawei’s firstwearable Talk Band B1 was launched globally in 2014 and is rapidly being recognised in the market forits unique innovative features. Huawei’s Honor X1 phablet, MediaQ M310 and Honor Cube have allbeen well-received by the market.
Home Devices
Huawei offers various home devices such as tablets, broadband access devices and the TV set-top-box.Huawei had distinctive advantages in its LTE-enabled devices, shipping over 26.6 million of suchdevices throughout 2014. Huawei also made strategic investments into smart wearables and smart homedomains. In 2014, according to Infonetics Research, Huawei was the largest provider of DSL CPEdevices globally in 2014, with shipments of 17.2 million units, capturing an approximately 18.5%market share.
In 2014, Huawei’s tablet sales increased 49% year-on-year as compared to 2013, with operators andchannel distributors from over 100 countries including Vodafone, Telefonica and Softbank signingpurchase orders for the MediaPad tablet series.
Sales and Marketing
Huawei sells its products and services both directly and through a variety of channels with support fromits sales force. Huawei’s channel partners include service providers, distributors and retail partners. Forthe years ended 31 December 2013 and 2014, the revenue contribution from the largest single customerto Huawei was 16% and 17%, respectively, of its total revenue.
Carrier Business
Huawei markets and sells its carrier network products and solutions to customers directly and alsoprovides system installation, technical support, professional services and other support services.Huawei’s customers are primarily fixed, mobile or convergent telecommunications carriers which arelicensed to offer data, voice, video and mobile services to the public. Huawei’s customers include manywell-established top carriers, such as China Mobile, China Telecom, China Unicom, Etisalat, Telefónica,and Vodafone, which own and operate multiple networks globally with dominant or substantial marketshare in their respective jurisdictions of operation. Huawei works closely with its customers in buildingefficient infrastructure to bring more value to end users in a better connected world.
Huawei typically enters into a long-term global framework agreement, usually five years or more, with atop carrier and the quantity and specification requirements as well as price of the products are agreedupon when each customer places a purchase order. In addition, Huawei also delivers its products andservices to over 500 other telecommunications carriers in over 170 countries and regions. Huawei’ssupply contracts with these customers are relatively short-term and are of a smaller scale. As a commonpractice in the telecommunications industry, Huawei requires its carrier customers to make an upfrontpayment upon contract signing, progress payments based on project milestones and final payment uponcompletion or full delivery. Huawei’s customers sometimes withhold a small portion of the contractprice as quality assurance, which will be paid over a specified time period. Huawei generally grants itscustomers a payment term of 30 to 120 days based on each customer’s credit grade which is reviewedperiodically by Huawei.
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Enterprise Business
By the end of 2014, Huawei had sold its products and services through over 6,000 channel partners ascustomers worldwide. Customers of Huawei’s Enterprise Business are generally fragmented,encompassing all scales of business or governmental entities globally.
Consumer Business
Huawei’s consumer products are globally distributed through network carriers, distributors and resellers.Huawei adopts a diversified channel strategy for its consumer products. As part of its marketingstrategy, Huawei plans to increase sales of mobile phones through distributors and resellers.
In 2014, Huawei made great efforts in developing open channels and retail outlets. There was asignificant growth in revenue contribution from open channels (including e-commerce), which accountedfor approximately 41% of the total revenue of 2014. In 2014, the sales revenue of its ConsumerBusiness reached RMB75,100 million, a year-on-year growth of 32.6%. As at 31 December 2014,Huawei’s Consumer Business established approximately 630 brand image stores globally, which greatlyenhanced the retail shopping experience for consumers around the world. In 2014, in open markets,where retail accounts for a high proportion of all sales, such as China, Russia, Italy, the UK, SaudiArabia, the Philippines and South Africa, the sales of Huawei’s smartphones increased by 45% ascompared to 2013. In addition, Huawei established strategic partnerships with top distributors andretailers in China, Western Europe, the Middle East, Southeast Asia and other key markets to helppromote Huawei’s sales. Huawei also relies on e-commerce channels such as JD.com and Taobao.com tomarket its consumer devices. In 2015, Huawei continues to develop open channels, focusing on overseaskey markets transformation to strengthen global distributor management and to cultivate long-termbuyer-seller partnerships.
Huawei continues to invest and successfully raise its brand franchise. By conducting a series of brandcampaigns worldwide, including sponsoring football games such as La Liga Spain, as well as well-known football clubs including A.C. Milan, Borussia Dortmund and Arsenal, Huawei significantlyenhanced the brand recognition of Huawei mobile phones. A recent consumer survey report from IPSOS,a market research firm, which covered 32 countries, found that Huawei’s brand awareness rose from52% in 2013 to 65% in 2014. In the Chinese market, the awareness of the Huawei brand increased to90% and that of the Honor brand increased to 54%. According to IPSOS, Huawei is among the top threebrands in terms of brand momentum for 2014. Huawei is also the first Chinese company to besuccessfully listed on Interbrand’s 2014 Top 100 Best Global Brands list.
Research and Development
Huawei is committed to investing in R&D activities to introduce competitive products and innovativesolutions and maintain its leadership in key technological areas of the ICT industry. To address marketrequirements, Huawei focuses on continuous customer-centric innovation. Huawei has extensivelyimplemented the integrated product development process within its R&D function. To ensure thatHuawei’s latest products reach consumers quickly, Huawei has shortened its R&D and productiontimeline by ensuring that technical innovations have clear customer relevance and can becommercialised in a short period with a reasonable rate of return. Focusing on the ICT pipe strategy,Huawei has increased investment in future-proof basic research and innovation, particularly in keytechnologies, basic engineering capabilities, architectures, standards, and product development. Huaweiaims to create a better user experience by providing broader, smarter, and more reliable pipes withhigher performance and zero wait time. Huawei is also committed to continuous innovation and hasmade significant achievements in the fields of future 5G communications, network architecture,computing and storage.
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As at 31 December 2014, Huawei had 28 Joint Innovation Centres with leading carriers as well as 16R&D centres in countries such as Germany, Sweden, the United States, India, Japan, Canada and China.Huawei employed approximately 76,000 product and solution R&D employees as at 31 December 2014,comprising 45% of its total global workforce.
Huawei’s R&D expenses were, RMB31,563 million and RMB40,845 million, respectively for the yearsended 31 December, 2013 and 2014. This represented 13.2% and 14.2% of its total sales revenue for therespective periods. Huawei has cumulatively spent more than RMB190 billion in R&D over the lastdecade.
In 2012, Huawei set up 2012 Laboratories, which functions as its innovation, research, and platformtechnology development arm. At the ITU, Huawei took the initiative to facilitate the establishment of anorganisation to research carrier software defined networking. Huawei was also a founding member of theoneM2M global partnership project.
In 2013, Huawei applied mainstream international industry standards and worked closely with globaltier-1 carriers and contributed positively to expanding the ICT industry. Huawei proposed identifying atminimum an additional 500 MHz of spectrum for international mobile telephony at the World RadioCommunication Conference 2015 and published a white paper titled 5G: A Technology Vision. As amajor facilitator of 5G projects initiated by the European Union and a founding member of the 5GInnovation Centre in the UK, Huawei proactively constructed a global 5G ecosystem and carried outjoint research in close collaboration with more than 20 universities worldwide. Huawei also led theresearch and design of 5G wireless air interface link technology at the METIS 2020 Project, a large andcomprehensive 5G research project funded by the European Commission.
In 2014, Huawei has increased its investment in the information value chain with a focus on ICTinfrastructure and the Pipe system strategy ranging from presentation and creation, to transportation anddistribution, and to storage and processing. Below are some of Huawei’s achievements in 2014:
In the wireless domain, Huawei continued to lead 4G innovation by launching CA technology formultiple base stations over IP RANs for simplified deployment and application of interferencecoordination technology to significantly enhance network performance. As a pioneer of 5G innovation.Huawei proposed SCMA, a key technology for 5G air interfaces, and partnered with mainstreamautomobile manufacturers in Europe to research 5G technologies for IoV and define the requirements offuture self-driving technologies on 5G communications networks. Huawei established a 5G InnovationCentre (5GIC) together with the University of Surrey in the UK, multiple well-known companies, andworld-renowned carriers. In November 2014, they jointly announced the world’s first 5G testbed inLondon, confirming Huawei’s position at the forefront of global 5G research. Huawei also pioneeredresearch into next-generation Wi-Fi, proposing the 10GiFi concept and launching the industry’s first10GiFi prototype. To date, Huawei is a leader in commercial LTE deployment worldwide and has beendedicated to driving the development of LTE standards with 665 accepted proposal submitted to 3GPPLTE core standards since 2010. These solutions have been deployed in more than 100 capital cities andnine financial centres.
In the fixed network domain, Huawei continues to lead innovation in core router, high-speed transport,and ultra-broadband access technologies. Huawei also passed the test for the industry’s first core router1T line card at EANTC, made a breakthrough in 400G clustering technology, and facilitated large-scalecommercial application of 400G clusters. Huawei released the industry’s first commercial 1T WDMcard, and worked with carriers to pass the testing for 3 Tbit/s WDM cards on live networks; the rate isequivalent to transmitting 100 uncompressed HD movies per second. As the first vendor to beginresearching G.fast, Huawei developed the industry’s first G.fast prototype, and released SuperVectortechnology which increases the speed of existing copper wires threefold. Furthermore, Huawei launchedthe SmartAX MA5800, the industry’s first smart OLT with distributed architecture at the BroadbandWorld Forum 2014. This product supports non-blocking access for 100G-PON and provides 100 Mbit/s
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non-blocking bandwidth to 32,000 homes, allowing users to enjoy 4K videos seamlessly. Huaweideveloped the industry’s first microwave-borne CPRI network based on high-order modulationmicrowave technology, which supports backhaul bandwidth of 4 Gbps.
In the enterprise networking domain, Huawei introduced the Agile Network architecture technology thatsupports full network programmability, dynamic network quality awareness, and smooth evolution toSDN. Huawei also converged different CPU architectures into a single architecture for enterprise branchnetworks. It used SDN and NFV technologies to deeply integrate IT and CT capabilities in gateways,which enables the local integration of ICT applications through an open virtualization platform. Huaweilaunched an open Cloud Fabric Data Centre Network architecture that supports interconnections withmainstream cloud platforms and is compatible with numerous virtual and physical networks. ChinaNational Petroleum Corporation used Huawei’s Data Centre Network Solution to build the largestenterprise cloud data centre in the Asia Pacific region in order to meet the requirements for data disasterrecovery and redundancy backup of ‘‘three data centres in two cities’’ at the group level.
In the core network domain, Huawei has become one of the first enterprises to complete the POC forvirtualised IMS in line with ETSI NFV ISG requirements, and established NFV/SDN open labs for jointinnovation with carriers and NFV ecosystem partners. It also launched real-time video experienceenhancement technology that automatically adapts to challenging network environments. This industry-leading technology has been embedded in core chipsets and is now one of Huawei’s core competencies.In addition, Huawei released the industry’s first xVCC (including eSRVCC) handover enhancementtechnology for live networks, enabling carriers to deliver consistent and seamless service experience indifferent access modes.
In the IT domain, Huawei has made many achievements in innovation, such as proposing SD-DC, afuture-oriented Service-driven Distributed Cloud Data Centre architecture. The IT domain consists offour different areas: the cloud computing field, the Big Data field, the storage field and the future datacentre field.
• In the cloud computing field, Huawei launched the first-of-its-kind distributed OpenStackcascading architecture that supports multi-data-centre resource consolidation and distributesscheduling and management of 100 data centres and one million hosts. It has won extensivesupport from mainstream carriers in Europe. Huawei also launched the industry’s first enterprise-level distributed software-defined storage system FusionStorage – with up to 256 servers in oneresource pool, the system has a throughput of 600 Gbit/s and reduces the fault recovery time of a 2TB hard disk to 5 minutes, 100 times faster than traditional SAN storage. When running theclustered SAP HANA in-memory database, the FusionStorage system reduces latency to 169 µs,the fastest in the industry. In addition, Huawei released FusionSphere 5.0, an OpenStack-basedcloud OS.
• In the Big Data field, Huawei launched the industry-leading Big Data solution FusionInsight,which is based on open technologies such as Hadoop, Spark, and Storm. Huawei also introducedBig Data solutions for the finance industry based on cutting-edge NoSQL clustering, applicationserver pooling, and stream processing technologies. This technology helps customers expand theperiod of historical data to be processed and shortens the service processing period for creditinvestigations in relation to issuing credit cards.
• In the storage field, Huawei launched the industry’s first converged storage operating system,OceanStor OS. The system supports convergence of SAN and NAS to boost capacity utilisation;multi-vendor heterogeneous storage devices to maximize customers’ ROI; performance andcapacity to allow flexible allocation of SSD and HDD media on demand as well as theconvergence of entry-level, mid-range, and high-end storage products to maximise data value. Thesystem also supports the integration of primary and backup storage, realizing backup in seconds,
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and agile, efficient data lifecycle management. Huawei’s high-end storage products provide a high-availability active-active data centre solution that delivers an RTO and RPO of zero at an inter-centre distance of up to 300 km, the longest in the industry.
• In the future data centre field, Huawei released the Data Centre 3.0 white paper at the InternationalSymposium on Computer Architecture (ISCA 2014) and defined the next-generation data centreDC3.0. It also developed the industry’s first operational computer prototype with all-opticalinterconnections and launched the industry’s first framework for CPU+GPU integrated clusteringresource.
Huawei has been focusing on and investing in key consumer technologies, infrastructure, algorithms andstandards, as well as leveraging Huawei’s leading capability in 4G and 5G wireless networks andchipsets. Huawei Consumer BG will continue to pursue innovation in product structure, design, audio,video, camera, interface, connectivity and battery life. Huawei Consumer BG is committed to puttinginnovative technology into application to create better user experiences for consumers.
Huawei plays an active role in contributing to the development of future wireless technologies, industrystandards and the industry chain. In addition, Huawei works to boost network capabilities such asservice exposure and service chaining in the areas of System Architecture Evolution and Policy andCharging Control. Huawei also took the lead in developing Network Functions Visualisation standardsto build an ICT convergence standards ecosystem and promoted the incubation of the carrier softwaredefined networking industry. Huawei also led the development of IP and Internet security rules thatexpanded interoperability, robustness and the Flex-OTN standards. Huawei is recognised as a majorcontributor of 100GE/400GE standards, taking the initiative to launch and lead research into the nextgeneration of WiFi standards at IEEE 802.11.
Huawei has gained considerable influence in setting international standards for the ICT industry thatenable Huawei to stay at the forefront of key technological development. By the end of 2014, Huaweiwas a member of 177 standards and open source organisations, including the 3GPP, IETF, IEEE, ITU,BBF, ETSI, TMF, WFA, CCSA, GSMA, OMA, ONF, INCITS, OpenStack and OpenDaylight. In 2014,Huawei submitted more than 4,800 proposals to these standards organisations. According to statisticsfrom 3GPP, Huawei has contributed 665 accepted proposal submitted to 3GPP LTE core standards since2010, which is the most in the industry and 25% of the world’s total. Up to 31 December 2014, Huaweihas submitted a total of 38,000 proposals. Moreover, Huawei held 183 key positions ranging fromchairperson and deputy chairperson, to board member, workgroup leader, reporter and speaker, includingIEEE-SA, ETSI, WFA, TMF, OneM2M, OMA, OASIS, and CCSA and many others. More than 700papers are accepted by these organizations every year. This demonstrates Huawei’s strong leadership interms of both standards and concepts.
By 31 December 2014, Huawei had filed 48,719 patent applications in China and 23,917 outside China.Of these applications, 38,825 have been granted. Huawei has the largest number of patents in China andis also one of the top 50 holders of patents granted in the United States and one of the top 10 holders ofpatents granted in Europe. Huawei is committed to continue investing 10% of sales revenue in R&Devery year to further strengthen its technological capabilities.
In the future, Huawei aims to increase investment in future key technologies and standards on wirelessnetworks. Huawei will invest at least US$600 million in 5G technology research and innovation by2018. Huawei believes that it has development opportunities in the communications industry as well asthe healthcare, retail, transportation, banking, media, education and manufacturing industries and is in aposition to help its customers meet communications needs.
Suppliers and Manufacturing
In 2013 and 2014, Huawei’s top five suppliers, based on the total cost of purchase, accounted for 19%and 13%, respectively, of total supplies to Huawei.
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The raw materials and components Huawei uses to manufacture its products include electrical andelectronic components, such as chips, circuit boards and optic components, as well as servers andaccessories. Huawei sources a majority of its raw materials and components from leading suppliers oftelecommunications components and IT equipment, such as Qualcomm, Foxconn, TI, Intel and JDI, withwhom Huawei has more than 10 years of collaboration. Huawei employs a competitive bidding processto select its suppliers in order to increase transparency, control costs and maintain the quality ofsupplies. Huawei generally orders supplies of raw materials and components based on its forecast ofdemand. Its purchase agreements generally include quantity, pricing, payment, termination and warrantyterms. Huawei generally keeps a reasonable level of inventory of raw materials and components tomitigate the risk of disruptions in raw material supplies while avoiding over-stocking and inventoryobsolescence.
Huawei strives to avoid single-source supplier solutions. For most of its raw materials and components,Huawei adopts a multiple-supplier strategy to diversify its sources of supply and reduce concentrationrisk. For a particular component that is available only from one supplier or a limited number ofsuppliers, Huawei typically enters into a guaranteed product supply arrangement with such suppliers,which gives Huawei the right to receive supplies on a priority basis and to claim compensation or otherremedies if such supplier fails to meet its quality or quantity requirements.
To reduce the risk of supply chain disruptions and enhance the capability of providing a quick responseto customer’s requirements, Huawei has built a global supply and manufacturing network and set upsupply and manufacturing centres in China, Hungary, Mexico, Brazil, India and Dubai. Huawei operatesits own manufacturing facility in Dongguan, China, which focuses on core product manufacturing, trialof new products, incubating global manufacturing technologies and management capabilities.
Huawei and its EMS vendors use its proprietary software on electronically programmable memory chipsfor designing parts and products that meet customers’ requirements and to guarantee quality control andproduct security. This controlled manufacturing process enables Huawei to configure hardware andsoftware in unique combinations to meet customer requirements, such as capacity and standards andapplies automated testing equipment and procedures, product inspection, testing, and process controlsthat are designed to help ensure the quality and reliability of its products. These manufacturingprocesses are generally certified to ISO 9001, ISO 14001 or TL9000 standards. Huawei’s qualitymanagement department, based in Shenzhen, is responsible for formulating its overall quality controlstrategy and objectives and supervises the implementation of its quality control procedures.
Competition
Huawei operates in the information and communications infrastructure markets, providing products,solutions and services for transporting data, voice and video traffic across intranets, extranets and theInternet. These markets are characterised by rapid changes, converging technologies and a migration tonetworking and communications solutions. These market factors represent both opportunities and threatsto Huawei.
Huawei competes with numerous vendors in each product category. The overall number of itscompetitors providing niche product solutions may increase. Also, the identity and composition ofcompetitors may change as they enter into new markets or businesses. As Huawei continues to expandglobally, it may face new competition in different geographic regions, in particular, competitors from theUnited States and Europe.
The principal competitive factors in the markets in which Huawei presently competes and may competein the future include:
• the ability to lead through critical technological cycles with new products and solutions, includingthose with technological and price-performance advantages;
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• technology leadership;
• market share and business scale;
• long-term relationship with and deep knowledge of its customers;
• participation and influence in setting industry standards;
• end-to-end solution capabilities that meet the customers’ comprehensive technical, financial andother requirements;
• breadth and depth of products and services;
• effective end-to-end cost management, including R&D, production, service delivery, procurement,functional and operational support; and
• brand.
Some of the competitors compete across a number of Huawei’s business lines, while others are primarilyfocused on a specific product area. Some of Huawei’s competitors may have greater technical,engineering, or capital resources. As Huawei expands into new markets, it will face competition not onlyfrom its existing competitors but also from other potential competitors. In addition, companies withwhom Huawei has strategic alliances in some areas may be competitors in other areas.
Insurance
Huawei currently maintains insurance coverage on its properties and fixed assets, plant and equipment,inventory and transportation, trade marks and third-party liability, which it considers to be exposed tomajor business risks. However, Huawei does not purchase business interruption insurance or directors’and officers’ liability insurance, which is not mandatory under PRC laws. Huawei believes that itsinsurance coverage is adequate and customary for the telecommunications industry.
Employees
As at 31 December 2014, Huawei employed approximately 170,000 employees. The following table setsforth a breakdown of Huawei’s employees by function as at 31 December 2014:
No. ofEmployees
Manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,000Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000Services and Technical Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000Corporate Services Functions and Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,500
To date, Huawei has not experienced any strikes or other labour disturbances that have materiallyaffected its operations and Huawei considers its relationships with its employees and the Union to bepositive. Competition for technical personnel in the industries in which it operates is intense. Huaweibelieves that its future success depends in part on its continued ability to hire, assimilate and retainskilled personnel. To date, Huawei believes that it has been successful in recruiting qualified employees.
Environment
Huawei is subject to various environmental regulations in each country where it operates. Generally,there are national or local standards applicable to, among others, carbon emissions. In addition, Huaweihas implemented the environmental protection strategy of ‘‘Green Pipe, Green Operations, GreenPartner, Green World’’ and is actively increasing its own energy efficiency while reducing its carbon
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footprint and energy consumption. Externally, Huawei works with suppliers, customers and partners toreduce the environmental impact throughout the products’ lifecycles, promoting a sustainable society.Huawei believes that as at 31 December 2014 it is in compliance in all material respects with allapplicable environmental laws which are relevant to its business in each jurisdiction in which itoperates.
Legal Proceedings
Huawei is from time to time involved in certain legal proceedings concerning matters arising in theordinary course of its business. Its management believes that the following three legal proceedingswarrant particular attention:
• In July 2011, InterDigital Corporation (‘‘IDC’’) filed a complaint with the United StatesInternational Trade Commission (the ‘‘USITC’’ or ‘‘Commission’’) and the United States DistrictCourt for the District of Delaware against Huawei Technologies Co., Ltd. (‘‘Huawei Tech’’) andFuturewei Technologies Inc. (‘‘Futurewei’’), both wholly-owned subsidiaries of the Company. Thecomplaint by IDC alleged that sales of imported 3G wireless devices by the said subsidiarieswithin the United States had infringed IDC’s 3G wireless patents and requested for issuance ofexclusion order and cease and desist order in relation to the accused 3G wireless devices concerned(‘‘the first complaint’’).
In December 2011, Huawei Tech filed a complaint against IDC in the PRC for violation of the fair,reasonable and non-discriminatory (‘‘FRAND’’) policies and the PRC’s Anti-Monopoly Law. InJune 2012, Huawei Tech filed another complaint with the European Commission (the ‘‘EC’’) torequest an investigation into the licensing fees requested by IDC, which it deemed exploitative,discriminatory and in violation of the FRAND policies as well as the EC’s antitrust law.
On 2 January 2013, IDC filed another two complaints with the USITC and the United StatesDistrict Court for the District of Delaware against Huawei Tech, Futurewei and Huawei DeviceUSA Inc. (‘‘USA Device’’), another wholly-owned subsidiary of the Company. The complaintsfurther alleged that the sales of certain 3G and 4G wireless devices sold by the said subsidiarieswithin the United States had infringed three of IDC’s other patents.
On 4 February 2013, the Shenzhen Intermediate People’s Court ruled that IDC had violated thePRC’s Anti-Monopoly Law and ordered IDC to compensate the Group for damages of RMB20million. The Court also ruled that the royalty rates licenses to Huawei Tech for IDC’s Chineseessential standard patents in wireless communication should not exceed 0.019% of the actual salesprices of Huawei Tech’s wireless devices.
On 11 March 2013, IDC filed appeals to the Guangdong Higher People’s Court in respect of therulings made by the Shenzhen Intermediate People’s Court. On 25 October 2013, the GuangdongHigher People’s Court upheld the Shenzhen Intermediate People’s Court’s ruling which is the finalruling.
On 28 June 2013 and 19 December 2013, the USITC ruled in favor of Huawei Tech, Futureweiand USA Device in respect of the first complaint in the initial determination and the finaldetermination, respectively.
On 23 December 2013, Huawei Tech, Futurewei and USA Device reached a settlement agreementwith IDC to withdraw or dismiss all the ongoing legal actions against each other. Under thesettlement agreement, the parties will solve their dispute through arbitration.
On 12 January 2015, the arbitration hearing was held in the United States to solve the disputebetween Huawei and InterDigital. The arbitration award is still pending.
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At this stage, Huawei is unable to predict the outcome of the arbitration, or reasonably estimate arange of possible loss, if any, given the current pending status of the arbitration.
• On 23 May 2012, Flashpoint Technology Inc. (‘‘Flashpoint’’) filed a complaint with the USITC,requesting the Commission to commence an investigation under Section 337 of the Tariff Act of1930 into certain electronic imaging devices manufactured by four alleged infringing companiesand their affiliates by reason of patent infringement and requested for issuance of an exclusionorder and cease and desist order in relation to the electronic imaging devices concerned. HuaweiTech and Futurewei were named as respondents. On 2 August 2012, the Administrative Law Judgegranted a joint motion to substitute Huawei Device Co., Ltd. (‘‘Huawei Device’’) and USA Devicefor Huawei Tech and Futurewei. Flashpoint also filed another complaint before the United StatesDistrict Court for the District of Delaware for the same reason against Huawei Device and USADevice. The legal action before District Court of Delaware was stayed.
On 30 September 2013, the Administrative Law Judge of the USITC issued an initial determinationin respect of Flashpoint’s complaint with USITC that Huawei Device and USA Device did notinfringe the asserted patents.
On 14 March 2014, the USITC issued the final determination deciding that Huawei Device andUSA Device did not infringe the asserted patents. Flashpoint did not appeal to such finaldetermination and the investigation terminated in the Group’s favor. Flashpoint subsequently alsodismissed its infringement assertions against Huawei Device and USA Device before the UnitedStates District Court for the District of Delaware. The Group could reasonably conclude that thislitigation is terminated and there is no possible loss to the Group.
• On 24 July 2012, Technology Properties Limited LLC (‘‘TPL’’) filed a complaint with the USITC,requesting the Commission to commence an investigation under Section 337 of the Tariff Act of1930 into certain wireless consumer electronics devices and components manufactured by thirteencompanies and their affiliates by reason of alleged patent infringement and requested for issuanceof an exclusion order and cease and desist order in relation to the electronic products concerned.Huawei Tech was named as one of the thirteen companies. On 21 August 2012, the USITCdecided to institute Section 337 investigation in relation to the electronic products concerned. TPLalso filed another complaint before the United States District Court for the Northern District ofCalifornia for the same reason. On 6 September 2013, the Administrative Law Judge of the USITCissued an initial determination that the Group did not infringe the asserted patent. On 19 February2014, the USITC issued a final determination that the Group did not infringe the asserted patent.TPL did not appeal the final determination within the statutory period, as a result, the USITCinvestigation formally terminated. With the termination of the investigation, the suit before theUnited States District Court for the Northern District of California was reopened. Given the factthat the suit in the district court remains in an early stage, the Group is unable to predict theoutcome of the suit, or reasonably estimate a range of possible loss if any.
Except as disclosed in this Offering Circular, neither Huawei nor any of its subsidiaries is involved inany litigation or arbitration proceedings that Huawei believes would have a material adverse effect on itsbusiness or financial position and nor is Huawei aware that any such litigations or proceedings arepending or threatened against it or any of its subsidiaries.
Capital Resources and Expenditures
To date, Huawei has primarily financed its business operations through cash flows generated fromoperating activities, capital injection and bank borrowings. Huawei’s cash requirements primarily includeexpenditures to fund its R&D activities, marketing and distribution, business expansion and workingcapital.
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As at 31 December 2014, Huawei had cash and cash equivalents of RMB78,048 million. As at 31December 2014, its unutilised committed banking facilities amounted to RMB13,660 million.
Indebtedness
As at 31 December 2014, Huawei had total loans and borrowings of RMB28,107 million, of whichapproximately RMB10,530 million will mature before 31 December 2015. The following table sets fortha breakdown of Huawei’s interest-bearing loans and borrowings as at the dates indicated:
As at 31 December
2014 2013
(RMB in millions)Short-term loans and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Intra-group guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,890 2,022Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 25
1,890 2,047Long-term loans and borrowingsIntra-group guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,254 18,351Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,382 1,644Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,581 991
26,217 20,986Total short-term and long-term loans and borrowings . . . . . . . . . . . . . . . . . . . . . . . . 28,107 23,033
Divided into:Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,577 19,990Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,530 3,043
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,107 23,033
As at 31 December 2014, Huawei had six syndicated term or revolving loan facilities denominated inUS dollars or Euros from a group of international banks and financial institutions. The borrowers ofthese facilities are Huawei’s major overseas subsidiaries, including Huawei Tech. Investment Co., Ltd.,Huawei Technologies Coöperatief U.A. and Huawei International Pte. Ltd. As at 31 December 2014, theaggregate principal amount which had been drawn down under five facilities was US$2,900 million forfacilities denominated in US dollars and €475 million for facilities denominated in Euro. These facilitieswill mature between April 2015 to July 2019.
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DIRECTORS AND MANAGEMENT
Driven by Huawei’s core values of customer-centricity and dedication, Huawei has maintained long-termeffective growth by continuously improving its corporate governance structure, organisation, processesand appraisal systems.
The following chart shows Huawei’s corporate governance structure as at 31 December 2014:
Shareholders
Huawei Investment & Holding Co., Ltd. is a private company wholly owned by its employees. Huawei’sshareholders are the Union and Mr. Ren Zhengfei.
Through the Union, Huawei implements the Scheme, which involved 82,471 employees as at 31December 2014. The Scheme effectively aligns employee contributions with the long-term developmentof the company, fostering Huawei’s continued success.
Mr. Ren Zhengfei is the individual shareholder of Huawei and also participates in the Scheme. As at 31December 2014, Mr. Ren Zhengfei’s investment (including those held directly by himself and throughthe Union) accounts for nearly 1.4% of Huawei’s total share capital.
The Shareholders’ Meeting and the Representatives’ Commission
The Shareholders’ Meeting is the highest authority within Huawei and comprises two shareholders: theUnion and Mr. Ren Zhengfei.
Huawei’s major issues, which involve the decisions of the Union as a shareholder of the Company, shallbe primarily reviewed and decided on by the Representatives’ Commission (the ‘‘Commission’’). TheCommission consists of representatives of shareholding employees (‘‘Representatives’’) and exercises
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rights on behalf of all shareholding employees. In 2014, the Commission held two meetings. TheCommission elected five additional members to the Supervisory Board. At these meetings, theCommission approved proposals on annual profit distribution, capital increases, regulations on the by-elections of members of the Supervisory Board and the incentive program TUP. The Commissionelected five additional members to the Supervisory Board.
TUP is a profit-sharing and bonus plan based on employee performance for all recipients in the Group.Under TUP, TBUs are granted to the recipients, which entitle the recipients to receive cash incentivescalculated based on the annual profit-sharing amount and the cumulative end-of-term gain amount. Bothof the annual profit-sharing and the end-of-term gain amount are determined at the discretion of theGroup. The TBUs will have an exercise period of five years, and after the first, second and thirdanniversary of the date of grant, one-third of the TBUs will become exercisable and recipients willreceive the annual profit-sharing amount. The end-of-term gain amount will be paid to the recipientsupon the expiry of the TBUs or at the date the recipients resign or are dismissed from the Group.
The 51 Representatives and nine alternate Representatives are elected by active shareholding employeeswith a term of service of five years. In the event that there is a vacancy in the body of Representatives,the alternate Representatives shall take up the vacancy in a predetermined sequence. The existingCommission was elected in December 2010.
At present, the Representatives are Ms. Sun Yafang, Mr. Guo Ping, Mr. Xu Zhijun, Mr. Hu Houkun,Mr. Ren Zhengfei, Mr. Xu Wenwei, Mr. Li Jie, Mr. Ding Yun, Ms. Meng Wanzhou, Ms. Chen Lifang,Mr. Wan Biao, Mr. Zhang Ping’an, Mr. Yu Chengdong, Mr. Liang Hua, Mr. Ren Shulu, Mr. Tian Feng,Mr. Deng Biao, Mr. Zhou Daiqi, Mr. Cai Liqun, Mr. Jiang Xisheng, Mr. Yin Xuquan, Mr. Yao Fuhai,Mr. Zha Jun, Mr. Li Yingtao, Ms. Ji Ping, Mr. Tao Jingwen, Mr. Zhang Shunmao, Mr. Ding Shaohua,Mr. Li Jin’ge, Mr. Wang Shengli, Mr. Wang Kexiang, Mr. Lv Ke, Mr. Yang Kaijun, Mr. Jiang Yafei,Ms. He Tingbo, Mr. Sun Ming, Mr. Wu Kunhong, Mr. Zhao Yong, Ms. Yan Weimin, Mr. TangXiaoming, Mr. Wang Jiading, Mr. Wei Chengmin, Mr. Xiong Lening, Mr. Li Shanlin, Mr. Xu Chi, Mr.Yang Shu, Mr. Song Liuping, Mr. Zhou Hong, Ms. Chen Jun, Mr. Hui Chun and Mr. Yang Yuefeng.
Board of Directors and Committees
The Board of Directors (‘‘BOD’’) is the decision-making body for corporate strategy and management.The BOD guides and oversees the overall business operations and makes decisions on significantstrategic issues. The BOD established the Human Resources Committee (‘‘HRC’’), the FinanceCommittee (‘‘FC’’), the Strategy & Development Committee (‘‘SDC’’) and the Audit Committee (‘‘AC’’)to assist and support BOD operations.
The main responsibilities of the BOD are to:
• decide on Huawei’s strategic directions and to approve and monitor the execution of Huawei’smedium-to-long-term development plan;
• provide advice and guidance to management regarding significant issues, including major crisesand market changes;
• review Huawei’s business operations, organisation and processes and approve major organisationalrestructurings, business transformations and process transformations;
• approve Huawei’s major financial policies, financial arrangements and business transactions;
• approve Huawei’s operating results, financial results and financial statements;
• establish Huawei’s monitoring mechanisms and oversee their execution;
• establish Huawei’s governance structure and organise its optimisation and deployment;
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• decide on the selection, appraisal and compensation of the chief executive officer (‘‘CEO’’) andapprove the appointment and compensation of other members of senior management; and
• approve the corporate-level human resources (‘‘HR’’) planning and major HR policies.
In 2014, the BOD held 12 meetings. At the meetings, the BOD reviewed and approved matters such asthe company’s medium-to-long-term development plan, annual business plan and budget, BODcommittee operations, compensation and incentives, management transformations, information security,mergers and acquisitions and cooperation. In addition, the BOD organised a training session for newdirectors.
Currently, the BOD has 17 members, who were elected by all Representatives.
The members of the BOD of the Guarantor as at the date of this Offering Circular are as follows:
Name Position
Ms. SUN Yafang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ChairwomanMr. GUO Ping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy ChairmanMr. XU Zhijun . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy ChairmanMr. HU Houkun . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy ChairmanMr. REN Zhengfei . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy ChairmanMr. XU Wenwei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive DirectorMr. LI Jie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive DirectorMr. DING Yun . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive DirectorMs. MENG Wanzhou. . . . . . . . . . . . . . . . . . . . . . . . . . Executive DirectorMs. CHEN Lifang . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMr. WAN Biao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMr. ZHANG Ping’an . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMr. YU Chengdong . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMr. LI Yingtao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMr. LI Jin’ge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMs. HE Tingbo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMr. WANG Shengli . . . . . . . . . . . . . . . . . . . . . . . . . . . Director
The BOD established the Executive Committee (the ‘‘Executive Committee’’), which acts as theexecutive body of the BOD while it is adjourned. Members of the Executive Committee include Mr.Guo Ping, Mr. Xu Zhijun, Mr. Hu Houkun, Mr. Xu Wenwei, Mr. Li Jie, Mr. Ding Yun and Ms. MengWanzhou. In 2014, the Executive Committee held 16 meetings.
Resume of Directors
Ms. SUN Yafang: Ms. Sun joined Huawei in 1989 and has served as an engineer in the Marketing &Sales Department, Director of the Training Centre, President of the Procurement Department, GeneralManager of Wuhan Office, President of the Marketing & Sales Department, Chair of the HumanResources Committee, Chair of the Business Transformation Executive Steering Committee (BT-ESC),Chair of the Strategy and Customer Standing Committee and President of Huawei University. Since1999, Ms. Sun has been the Chairwoman of the BOD.
Prior to joining Huawei, Ms. Sun worked as a technician at the state-owned Xinxiang Liaoyuan RadioFactory in 1982, as a teacher at China Research Institute of Radio Wave Propagation in 1983 and as anengineer at Beijing Research Institute of Information Technology in 1985.
Ms. Sun was born in 1955 and graduated in 1982 with a bachelor’s degree from Chengdu University ofElectronic Science and Technology.
Mr. GUO Ping: Born in 1966, Mr. Guo holds a master’s degree from Huazhong University of Scienceand Technology. Mr. Guo joined Huawei in 1988 and has served as R&D Project Manager, GeneralManager of Supply Chain, Director of Huawei Executive Office, Chief Legal Officer, President of the
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Business Process & IT Management Department, President of the Corporate Development Departmentand Chairman and President of Huawei Device. Currently, Mr. Guo serves as Deputy Chairman of theBoard, Rotating CEO and Chairman of the FC.
Mr. XU Zhijun (Eric Xu): Born in 1967, Mr. Xu holds a doctorate degree from Nanjing University ofScience & Technology. Mr. Xu joined Huawei in 1993 and has served as President of the WirelessNetwork Product Line, Chief Strategy & Marketing Officer, Chief Products & Solutions Officer andChairman of the Investment Review Board. Currently, Mr. Xu serves as Deputy Chairman of the Board,Rotating CEO and Chairman of the SDC.
Mr. HU Houkun (Ken Hu): Born in 1968, Mr. Hu holds a bachelor’s degree from Huazhong Universityof Science and Technology. Mr. Hu joined Huawei in 1990 and has served as President of the Marketing& Sales Department in China, President of the Latin America Region, President of the Global SalesDepartment, Chief Sales & Service Officer, Chief Strategy & Marketing Officer, Chairman of theCorporate Global Cyber Security Committee, Chairman of the BOD of Huawei USA, Deputy Chairmanof the Board, Rotating CEO and Chairman of the HRC.
Mr. REN Zhengfei: Born on 25 October, 1944 into a rural family where both parents were schoolteachers, Mr. Ren Zhengfei spent his primary and middle school years in a remote mountainous town inGuizhou Province. In 1963, he studied at the Chongqing Institute of Civil Engineering and Architecture.After graduation, he was employed in the civil engineering industry until 1974 when he joined themilitary’s Engineering Corps as a soldier tasked to establish the Liao Yang Chemical Fiber Factory.Subsequently, Mr. Ren Zhengfei had taken positions as a Technician, an Engineer and was lastlypromoted as a Deputy Director, which was a professional role equivalent to a Deputy Regimental Chief,but without military rank. Because of his outstanding performance, Mr. Ren Zhengfei was invited toattend the National Science Conference in 1978 and the 12th National Congress of the Communist Partyof China in 1982. Mr. Ren Zhengfei retired from the army in 1983 when the Chinese governmentdisbanded the entire Engineering Corps. He then worked in the logistics service base of the ShenzhenSouth Sea Oil Corporation. As he was dissatisfied with his job, he decided to establish Huawei with acapital of RMB21000 in 1987. He became the CEO of Huawei in 1988 and has held the title ever since.
Mr. XU Wenwei (William Xu): Born in 1963, Mr. Xu holds a master’s degree from SoutheastUniversity. Mr. Xu joined Huawei in 1991 and has served as President of the International TechnicalSales & Marketing Department, President of the European Area, Chief Strategy & Marketing Officer,Chief Sales & Service Officer, President of the Joint Committee of Regions, CEO of the Enterprise BGand Chief Strategy Marketing Officer.
Mr. LI Jie (Jason Li): Born in 1967, Mr. Li holds a master’s degree from Xi’an Jiaotong University.Mr. Li joined Huawei in 1992 and has served as Regional President, President of the Global TechnicalService Department, President of the Human Resource Management Department and President of theJoint Committee of Regions.
Mr. DING Yun (Ryan Ding): Born in 1969, Mr. Ding holds a master’s degree from SoutheastUniversity. Mr. Ding joined Huawei in 1996 and has served as Product Line President, President of theGlobal Solution Sales Department, President of the Global Marketing Department, Chief Products &Solutions Officer and CEO of the Carrier Network BG.
Ms. MENG Wanzhou (Sabrina Meng): Born in 1972, Ms. Meng holds a master’s degree fromHuazhong University of Science and Technology. Ms. Meng joined Huawei in 1993. She then obtainedher M.A. in 1998. Ms. Meng has served as Director of the International Accounting Department, chieffinancial officer (‘‘CFO’’) of Huawei Hong Kong, President of the Accounting Management Departmentand President of the Sales Financing & Treasury Management Department. Currently, Ms. Meng servesas CFO of Huawei.
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Ms. CHEN Lifang: Born in 1971, Ms. Chen graduated from Northwest University in China. Ms. Chenjoined Huawei in 1995 and has served as Chief Representative of the Beijing Representative Office,Vice President of the International Marketing Department, Deputy Director of the Domestic MarketingManagement Office, President of the Public Affairs and Communications Department and CorporateSenior Vice President.
Mr. WAN Biao: Born in 1972, Mr. Wan holds a bachelor’s degree from the University of Science andTechnology of China. Mr. Wan joined Huawei in 1996 and has served as Director for the UMTS RANSystem, President of the UMTS Product Line, President of the Wireless Network Product Line, CEO ofHuawei Device and President of the Russia region.
Mr. ZHANG Ping’an (Alex Zhang): Born in 1972, Mr. Zhang holds a master’s degree from ZhejiangUniversity. Mr. Zhang joined Huawei in 1996 and has served as Product Line President, Senior VicePresident, Vice President of Strategy & Marketing, Regional Vice President, Vice President of theGlobal Technical Service Department, CEO of Huawei Symantec and chief operating officer (‘‘COO’’)of the Enterprise BG. Currently, Mr. Zhang serves as President of the Carrier Software Business Unit.
Mr. YU Chengdong (Richard Yu): Born in 1969, Mr. Yu holds a master’s degree from TsinghuaUniversity. Mr. Yu joined Huawei in 1993 and has served as 3G Product Director, Vice President of theWireless Technical Sales Department, President of the Wireless Network Product Line, President of theEuropean Area, Chief Strategy & Marketing Officer, Chairman of Huawei Device and CEO of theConsumer BG.
Mr. LI Yingtao: Born in 1969, Mr. Li holds a doctorate degree from Harbin Institute of Technology.Mr. Li joined Huawei in 1997 and has served as Chief of the Sweden Research Centre, Director of theProduct Management Department of Wireless Marketing, Director of the Research Department ofProducts & Solutions, Director of the General Technology Office of Products & Solutions, President ofthe Central Research & Development Unit, President of the 2012 Laboratories, Director of the IntegratedTechnology Management Committee, member of the HRC and member of the SDC.
Mr. LI Jin’ge: Born in 1968, Mr. Li holds a bachelor’s degree from Beijing University of Posts andTelecommunications. Mr. Li joined Huawei in 1992 and has served as Regional Vice President,Regional President, President of the Global Technical Sales Department, President of the Sub-SaharaArea, member of the Joint Committee of Regions, member of the FC and President of the Asia PacificArea.
Ms. HE Tingbo (Teresa He): Born in 1969, Ms. He holds a master’s degree from Beijing University ofPosts and Telecommunications. She joined Huawei in 1996 and has since served as Principal ASICEngineer and R&D Director of HiSilicon. Currently, Ms. He serves as President of HiSilicon and VicePresident of the 2012 Laboratories.
Mr. WANG Shengli (Victor Wang): Born in 1963, Mr. Wang holds a master’s degree from WuhanUniversity. He joined Huawei in 1997 and has served as Regional Vice President, Regional Presidentand President of the Asia-Pacific Area. Currently, Mr. Wang serves as President of the European Area,executive member of the Management Team of the Joint Committee of Regions, Director of the overseassubsidiaries’ Board Bureau and Chairman of the Board of Huawei Technologies Coöperatief U.A.
Human Resources Committee
The HRC manages and optimises core corporate elements such as organisation, talent, incentives andculture. It operates under the BOD to develop, determine and oversee the implementation of key policiesand transformation initiatives relating to HR management. The committee aligns HR policies withHuawei’s HR management philosophy and core concepts to ensure policy consistency. These policiesalso reflect the business characteristics and management models of departments at all levels to supportbusiness development.
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The main responsibilities of the HRC are to:
• manage HR initiatives for key managers and talent (including succession planning, deployment,appointments/removals, performance appraisals, compensation and incentives);
• set policies for incentives, benefits, the compensation structure and job matching;
• set policies for organisational development and optimisation and manage HR budgets and staffingfor each budgetary unit;
• set policies for and provide guidance on learning and development;
• set policies for employee discipline and oversee disciplinary action for major violations;
• set policies for and provide guidance on health and safety; and
• manage HR strategic planning and key HR transformation initiatives.
The HRC holds monthly meetings. Business executives, HR executives from key departments andvarious experts are invited to attend as non-voting participants.
The committee met 12 times in 2014 and achieved its annual targets in the areas of developing HRmanagement frameworks and policies, making key decisions and overseeing policy execution. Thespecific initiatives are as follows:
• formulated strategic plans for HR management to satisfy BOD requirements, meet globaldevelopment needs of business groups and manage Huawei’s diverse workforce;
• identified specific talent requirements for different job levels and positions based on corporatestrategies and future development needs and implemented the ‘‘Leadership Model’’ andqualification management system to adapt managers to business strategies;
• implemented the ‘‘Contribute and Share’’ bonus system, tailored compensation and incentivestrategies and standards for different job categories, increased incentives for high-performingemployees and rolled out the TUP globally and increased monetary incentives and established amanagement framework to create more non-monetary incentives;
• restructured organisations based on three dimensions – customers, products and regions; delegatedmore authority to field offices and managed workforce budgets more flexibly based on businessneeds;
• strengthened employee discipline and improved healthcare initiatives; and
• launched a three-to-five-year program to improve HR management capabilities and deliverprofessional and efficient HR services.
The HRC comprises 15 members, including BOD members, senior business executives and senior HRexperts.
• Chairman: Mr. Hu Houkun.
• Members: Mr. Guo Ping, Mr. Xu Zhijun, Mr. Xu Wenwei, Mr. Li Jie, Mr. Ding Yun, Ms. MengWanzhou, Mr. Li Yingtao, Mr. Wan Biao, Ms. He Tingbo, Mr. Zhang Ping’an, Mr. Zha Jun, Mr.Li Jin’ge, Mr. Peng Bo and Mr. Li Shanlin.
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Finance Committee
The FC is Huawei’s overall enterprise value integrator. It operates under the BOD to exercise macro-control over the company’s business operations, investment activities and enterprise risks, helping tostrike a dynamic balance between opportunities and resources to facilitate the company’s long-termeffective growth.
The main responsibilities of the FC are to:
• align resources with business needs based on the Group’s resources and resource acquisitioncapabilities;
• set financial objectives for the growth and investment projects of the Group and each responsibilitycentre; and determine the standards, structure and pace for resource investments;
• measure the monetary value of key strategies, conduct forward-looking forecasts and analysis andsubmit proposals to the BOD; and review the Group’s annual budget plan, approve the annualbudget for each responsibility centre and ensure closed-loop management of corporate-levelplanning, budgeting, accounting and assessment;
• review the capital structure plan and propose major financing activities, the asset structure andprofit distribution;
• review the Group’s key financial policies, annual financial statements and related informationdisclosures;
• review capital investment and strategic cooperation projects, submit proposals to the BOD andperiodically assess the execution of such projects; and
• review the Group’s risk management framework and provide advice on operational compliance andbusiness continuity management.
The FC holds monthly meetings and convenes special sessions as necessary. Based on business needsand BOD’s requirements, the FC held 13 meetings in 2014. At the meetings, the FC reviewed such keyitems as the Group’s medium-to-long-term development plan, annual budget plan, operationalmanagement, capital investment projects, capital structure, enterprise risk management and subsidiaryand joint venture management. The FC then discussed and established financial policies and systems,reviewed and decided on key initiatives and monitored their execution.
The FC comprises 15 members, including BOD members and various experts.
• Chairman: Mr. Guo Ping.
• Members: Mr. Xu Zhijun, Mr. Hu Houkun, Mr. Xu Wenwei, Mr. Li Jie, Mr. Ding Yun, Ms. MengWanzhou, Mr. Liang Hua, Mr. Yi Xiang, Mr. Fang Weiyi, Mr. Zou Zhilei, Mr. Yao Fuhai, Mr.Xiong Lening, Mr. Song Liuping and Mr. Peng Qiu’en.
Strategy & Development Committee
The SDC develops, sets and executes Huawei’s strategic directions. The SDC gains insight into majorindustry and technological trends, changes in customer needs and identifies opportunities and paths forthe company’s development. Through macro-management of industrial investments, technologies,business models and transformations, the SDC ensures that concerted efforts are made to maintainHuawei’s effective growth.
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The main responsibilities of the SDC are to:
• manage the Group’s medium-to-long-term strategic planning, key initiatives and major objectivesof the year;
• manage the Group’s brand strategy, brand architecture and brand attributes, as well as publicitystrategy and direction;
• manage the Group’s strategy for strategic partnerships and alliances, as well as the selection ofstrategic partners and alliances;
• manage the Group’s business portfolios and scope;
• manage the Group’s pricing policies, commercial authorisation principles and actual pricing of keystrategic products;
• manage the Group’s medium-to-long- term technology development planning, standards and patentstrategy and major technology investments;
• manage the Group’s medium-to-long-term business transformation strategy, process andmanagement system structures and quality policies, amongst others; and
• review the Group’s business portfolios to ensure investments are made in strategic domains.
The SDC held 12 meetings and two special sessions in 2014. Based on the practice over the past twoyears, the SDC strengthened the review of regional strategies and enhanced strategic alignment, synergyand execution. In accordance with the positioning and responsibilities determined by the BOD, the SDCcontinued to guide business units to build future-proof core competences along the path of strategicfocus, innovation, differentiation and leadership. On this basis, the SDC aims to expand its share in theindustry, formulate the future development strategy and promote its execution to support Huawei’s long-term development.
The SDC comprises 15 members, including BOD members, senior business executives and varioussenior experts.
• Chairman: Mr. Xu Zhijun.
• Members: Mr. Guo Ping, Mr. Hu Houkun, Mr. Xu Wenwei, Mr. Li Jie, Mr. Ding Yun, Ms. MengWanzhou, Mr. Yu Chengdong, Mr. Li Yingtao, Mr. Liang Hua, Mr. Zhang Ping’an, Mr. Zha Jun,Mr. Deng Biao, Mr. Wang Shengqing and Mr. Zhang Shunmao.
Audit Committee
The AC operates under the BOD to oversee internal controls, including the internal control system,internal and external audits, corporate processes, legal compliance and adherence to Business ConductGuidelines (‘‘BCGs’’).
The main responsibilities of the AC are to:
• approve the annual internal audit plan and review its scope, required resources and audit outputs;
• approve corporate policies for internal controls, approve the corporate development plan forinternal controls and the plan’s key milestones and regularly assess the company’s internal controlstatus;
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• evaluate the effectiveness of the ethics and compliance function, legal compliance and adherenceto corporate policies;
• approve the selection of the external auditor, notify the BOD of any proposed change to theexternal auditor for approval, approve related budgets and evaluate the work of the externalauditor;
• supervise the completeness, accuracy and legal compliance of Huawei’s financial statements andreview compliance with accounting policies and all financial disclosures; and
• approve internal control key performance indicators at the beginning of each year and instructGlobal Process Owners (‘‘GPOs’’) and business executives to report internal control results.
The AC holds quarterly meetings and convenes special sessions as necessary. Business executives andvarious experts are invited to attend as non-voting participants.
The committee held seven meetings in 2014. Focusing on topics such as risk management, thedevelopment of the internal control system and anti-corruption, the committee:
• reviewed and approved Huawei’s annual internal audit plan and annual plan for internal controlson global processes;
• received reports on internal control maturity trends, SACA, internal control improvements byGPOs, assessments on the internal control framework and accountability system and the anti-corruption roadmap;
• improved employee compliance with BCGs by publicising major audit findings and non-compliance cases; and
• arranged discussions between the committee chairman and the external auditor on managementimprovement proposals.
The AC comprises 10 members, including Supervisory Board members, BOD members and variousexperts.
• Chairman: Mr. Liang Hua.
• Members: Mr. Zhou Daiqi, Mr. Ren Shulu, Mr. Li Jianguo, Mr. Yin Xuquan, Mr. Tian Feng, Mr.Song Liuping, Mr. Yi Xiang, Mr. Li Jin’ge and Mr. Hui Chun.
Supervisory Board
Pursuant to the requirements of the Company Law of the People’s Republic of China, Huawei hasestablished a Supervisory Board (the ‘‘Supervisory Board’’). The key responsibilities of theSupervisory Board include examining Huawei’s financial and operational status, monitoring theresponsibility fulfillment of BOD members and senior management as well as the standardisation ofBOD operations. Members of the Supervisory Board attend BOD meetings as non-voting participants.
In 2014, the Supervisory Board held nine meetings. At the meetings, it evaluated Huawei’s financialposition, received reports from the Group’s supervisory functions and assessed the responsibilityfulfillment of its own members and that of BOD members. The Supervisory Board organised its owncandidate nomination and elected its executive members. Throughout the year, members of theSupervisory Board attended 12 meetings of the BOD as non-voting participants, monitoring the Group’sfinancial position, the responsibility fulfillment of BOD members and senior management and thestandardisation of BOD operations.
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On 28 November 2014, all of the Representatives elected five additional members of the SupervisoryBoard.
Currently, the Supervisory Board comprises nine members.
• Chairman: Mr. Liang Hua.
• Executive members: Mr. Zhou Daiqi, Mr. Ren Shulu, Mr. Li Jianguo and Mr. Yin Xuquan.
• Members: Mr. Tian Feng, Mr. Deng Biao, Mr. Song Liuping and Mr. Yi Xiang.
Resume of Supervisory Board Members
Mr. Liang Hua (Howard Liang): Born in 1964, Mr. Liang holds a doctorate degree from WuhanUniversity of Technology. Mr. Liang joined Huawei in 1995 and has served as President of SupplyChain, CFO of Huawei, President of the Business Process & IT Management Department, President ofthe Global Technical Service Department, Chief Supply Chain Officer and Chairman of the AC.
Mr. Zhou Daiqi: Born in 1947, Mr. Zhou graduated from Xidian University. Mr. Zhou joined Huaweiin 1994 and has served as ATM Product Manager, Chief Engineer and General Manager of theMultimedia Department, Director of the Hardware Department, Chief of the Xi’an Research Centre andDirector of the HR Branch of Products & Solutions. Currently, Mr. Zhou serves as Chief Ethics &Compliance Officer, Director of the Corporate Committee of Ethics and Compliance and member of theAC.
Mr. Ren Shulu (Steven Ren): Born in 1956, Mr. Ren holds a bachelor’s degree from YunnanUniversity. Mr. Ren joined Huawei in 1992 and has served as President of Shenzhen Smartcom BusinessCo., Limited and Chairman of the Capital Construction Investment Management Committee. Currently,Mr. Ren serves as Chairman of the Internal Service Management Committee.
Mr. Li Jianguo: Born in 1964, Mr. Li holds a master’s degree from Huazhong University of Scienceand Technology. Mr. Li joined Huawei in 1993 and has served as an R&D engineer, Deputy Manager ofthe Development and Pilot (‘‘D&P’’) Department, Manager of the Manufacturing Department, ExecutiveVice President of Huawei Electric, Director of the Assembly Business Department, Deputy Director ofthe Supply Chain Management Department, Director of the Board Design Engineering Department underthe Central Research & Development Unit (‘‘CRDU’’), Director of the PDT/TDT Leaders ManagementDepartment under the CRDU and President of the Manufacturing SBG. Currently, Mr. Li serves asPresident of the Manufacturing Department.
Mr. Yin Xuquan: Born in 1964, Mr. Li holds a master’s degree from Xi’an Jiaotong University. Mr.Yin joined Huawei in 1995 and has served as President of the Southern Africa Region, Vice President ofthe Turnkey Business Department, President of the Optical Network Product Line, HR Director of Sales& Service Department and Vice President of the Procurement Qualification Management Department.
Mr. Tian Feng: Born in 1969, Mr. Tian holds a bachelor’s degree from Xidian University. Mr. Tianjoined Huawei in 1995 and has served as Executive Vice President (‘‘EVP’’) of the Middle East andNorthern Africa Area, President of the Middle East Region, President of the China Region, CEO ofHuawei Agisson, Vice President (acting) of the Human Resource Management Department, EVP ofHuawei University, Director of the Institute of Education of Huawei University, Director of theDisciplinary and Supervisory Sub-committee of the HRC and executive member of the ManagementTeam of the Joint Committee of Regions.
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Mr. Deng Biao (Alex Deng): Born in 1971, Mr. Deng holds a bachelor’s degree from JiangxiUniversity. Mr. Deng joined Huawei in 1996 and has served as President of the Access Network ProductLine, President of the Network Product Line, President of the Carrier Software & Core NetworkBusiness Unit and President of the Quality, Business Process & IT Management Department.
Mr. Song Liuping: Born in 1966, Mr. Song completed his postdoctoral research at the Beijing Instituteof Technology. Mr. Song joined Huawei in 1996 and has served successively as Manager of the ProductStrategy Planning Department, Director of the IPR Department, Director of External CooperationDepartment, PSST member, President of the Legal Affairs Department, Chief Legal Officer, President ofthe Patent Review Board, Director of the Trade and Customs Compliance Committee, member of theDisciplinary and Supervisory Sub-committee of the HRC and member of the FC.
Mr. Yi Xiang (Steven Yi): Born in 1975, Mr. Yi holds a bachelor’s degree from Wuhan University. Mr.Yi joined Huawei in 1998 and has served as Director of the Sales Management Department in the Asia-Pacific Area, General Manager of the Pakistan Representative Office, President of the Middle EastRegion, President of the Middle East and Africa Area, President of the Sales & Delivery ManagementDepartment and Deputy CFO of Huawei. Currently, Mr. Yi serves as President of the RegionsManagement Department, Director of the Transformation Project Office and member of the FC.
Committee Members
Committee members not listed in ‘‘Directors and Management – Resume of Directors’’ or ‘‘Directors andManagement – Resume of Supervisory Board Members’’ are included below.
Mr. Wang Shengqing (Ken Wang): Born in 1972, Mr. Wang holds a master’s degree from HuazhongUniversity of Science and Technology. Mr. Wang joined Huawei in 1997 and has served as DeputyDirector of the Mobile Technical Sales Department in China, Deputy Director (acting) of the TechnicalSales Department in the Asia Pacific Area, Deputy General Manager of the Indonesia RepresentativeOffice, Director of the Telefonica Account Department and President of the Marketing & SolutionDepartment.
Mr. Fang Weiyi: Born in 1965, Mr. Fang holds a master’s degree from the Aeronautics ComputingTechnique Research Institute. Mr. Fang joined Huawei in 1995 and has served as an engineer, Directorof the Intelligent Network Product Line, Director of the Strategy and Planning Department, President ofthe Finance Management Department, President of the Sales & Delivery Finance ManagementDepartment and CFO of the Carrier Network BG. Currently, Mr. Fang serves as Director of the FinanceManagement Department of the Carrier BG and member of the FC.
Mr. Li Shanlin: Born in 1968, Mr. Li holds a master’s degree from Beijing University of Aeronauticsand Astronautics. Mr. Li joined Huawei in 1996 and has served as R&D Project Manager, DepartmentManager at Huawei Technologies India Private Limited, Deputy Chief of the Beijing Research Centre,Director of the R&D Department of the Data Communications Product Line, Director of the HR Branchof Products & Solutions, Vice President of the Human Resource Management Department and memberof the HRC.
Mr. Zou Zhilei: Born in 1971, Mr. Zou holds a bachelor’s degree from Hefei University of Technology.Mr. Zou joined Huawei in 1998 and has served as General Manager of the Xi’an Representative Office,General Manager of the Guangzhou Representative Office, President of the Northern Africa Region,President of the Global Sales Department under the Enterprise BG and President of the Global Sales andService Department under the Enterprise BG. Currently, Mr. Zou is EVP of the Carrier BG and memberof the FC.
Mr. Zhang Shunmao (Patrick Zhang): Born in 1966, Mr. Zhang holds a master’s degree from FudanUniversity. Mr. Zhang joined Huawei in 1992 and has served as Director of the Switch BusinessDepartment of the Central Research Department, Vice President of the Technical Support Department,
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Corporate Senior Vice President, EVP of the Marketing Department, President of the Fixed NetworkProduct Line, President of the Wireless Network Product Line, EVP of the Latin America Area,President of the Northern Latin America Region and President of the Enterprise Business Marketing &Solutions Department.
Mr. Zha Jun: Born in 1971, Mr. Zha holds a master’s degree from Zhejiang University. Mr. Zha joinedHuawei in 1997 and has served as R&D Product Manager, Director of the IMS Product Line, Presidentof the Router and Network Security Product Line, President of the Fixed Network Business Unit,President of the Fixed Network Product Line, member of the HRC and member of the SDC.
Mr. Yao Fuhai: Born in 1968, Mr. Yao holds a bachelor’s degree from the University of ElectronicScience and Technology of China. Mr. Yao joined Huawei in 1997 and has served as Director of thePricing Centre, Vice President of the Business Process & IT Management Department, Vice President ofthe Strategy Cooperation Department, Vice President of the Global Technical Sales Department andPresident of the Global Technical Service Department. Currently, Mr. Yao serves as President of theProcurement Qualification Management Department, Director of the Group Procurement ManagementCommittee and member of the FC.
Mr. Peng Qiu’en (Ted Peng): Born in 1971, Mr. Peng holds a master’s degree from ZhongnanUniversity of Economics and Law. Mr. Peng joined Huawei in 1997 and has served as Director of theBudget & Cost Management Section, Director of the Financial Planning & Analysis Department, VicePresident of the Sales & Delivery Finance Management Department and CFO of the India Region.Currently, Mr. Peng serves as President of the Finance Management Department and member of the FC.
Mr. Peng Bo (Vincent Peng): Born in 1976, Mr. Peng holds a bachelor’s degree from Harbin Instituteof Technology. Mr. Peng joined Huawei in 1999 and has served as Account Manager of the CustomerRelationship Management Department, Account Manager of the Hong Kong Representative Office,President of the Vodafone Account Department, Vice President of the West European Region, Presidentof the Accounts Business Department, President of the Sales & Accounts Business Department under theCarrier BG, member of the Carrier BG Executive Management Team (‘‘EMT’’), member of the HRCand member of the SDC.
Mr. Hui Chun (Clark Hui): Born in 1963, Mr. Hui holds a master’s degree from Huazhong Universityof Science and Technology. Mr. Hui joined Huawei in 1989 and has served as President of theProcurement Qualification Management Department, Vice President of Finance & President of theBusiness Control Department and Vice President of the Business Process & IT Management Department.Currently, Mr. Hui serves as Director of the Engineering Inspection Department and member of the AC.
Mr. Xiong Lening: Born in 1969, Mr. Xiong holds a bachelor’s degree from Zhejiang University. Mr.Xiong joined Huawei in 1993 and has served as Deputy Director of the Development and Pilot(‘‘D&P’’) Department, General Manager of the Chengdu Representative Office, Director of the BeijingBranch, Director of the China Mobile Account Department, Vice President of the China Region andEVP (acting) of the Russia region. Currently, Mr. Xiong serves as President of the Supply ChainManagement Department and member of the FC.
Rotating CEOs
Huawei implements the rotating CEO system under the BOD’s leadership. As the primary controller ofHuawei’s operations and crisis management during the tenure, the Rotating and Acting CEO isresponsible for the company’s survival and development.
The Rotating and Acting CEO convenes and chairs the Group’s Executive Management Team (‘‘EMT’’)meetings. During routine management decision making, the Rotating and Acting CEO promptly notifiesthe BOD and Supervisory Board members of responsibilities which have been fulfilled.
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The three Deputy Chairmen take turns to act as the Rotating and Acting CEO for a tenure of six months.In 2014, the acting tenures for the three rotating CEOs were as follows:
• Mr. Xu Zhijun: October 1, 2013 – March 31, 2014
• Mr. Guo Ping: April 1, 2014 – September 30, 2014
• Mr. Hu Houkun: October 1, 2014 – March 31, 2015
Business Structure
In 2014, Huawei gradually adjusted its business structure to focus on three dimensions – customers,products and regions. All organisations jointly create value for customers and are responsible for theGroup’s financial results, market competitiveness and customer satisfaction.
Based on the business patterns and operational characteristics of the carrier, enterprise and consumersegments, Huawei restructured three BGs to deliver innovative, differentiated and leading solutions.
To adapt to the increasing convergence of IT and CT technologies, Huawei established the Products &Solutions department to sharpen its competitive edge in products and solutions, fully leverage thecompetitive advantages of its integrated ICT portfolio and deliver a better user experience.
Regional organisations are the company’s regional operations centres and are responsible for developingand effectively utilising regional resources and capabilities. The Group has optimised regionalorganisations and accelerated the pace of delegating authority to field offices. While establishing closerpartnerships with customers and helping them achieve business success, the Group maintains effectiveand sustainable growth.
Group Functions provide business support, services and supervision. They are positioned to offeraccurate, timely and effective services to field offices and strengthen supervision while delegatingsufficient authority to them.
Independent Auditor
An independent auditor is responsible for auditing Huawei’s annual financial statements. In accordancewith applicable accounting standards and audit procedures, the independent auditor expresses an opinionas to whether the financial statements are true and fair.
The scope of the financial audit and the annual audit results are subject to review by the AC. Anyrelationship or service that may potentially affect the objectivity and independence of the independentauditor can be discussed with the AC. The independent auditor may discuss any issues identified or anydifficulties encountered during the course of the financial audits with the AC.
KPMG Huazhen has been Huawei’s independent auditor since 2000.
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THE GUARANTEE
The Guarantor will unconditionally and irrevocably guarantee the due payment of all sums expressed tobe payable by the Issuer under the Bonds. Its obligations in respect of the Guarantee will be containedin the Trust Deed to be dated on or about 19 May 2015.
The Guarantor is required to register the Guarantee and will register the Guarantee with the ShenzhenBranch of SAFE within 15 business days after the execution date of the Guarantee pursuant to the SAFENotice. If the Guarantor fails to register the Guarantee within the prescribed timeframe, the Guarantorwill not be able to purchase or remit foreign currency in order for the Guarantor to fulfil its paymentobligations under the Guarantee. The Bondholders will need to rely on the Issuer to source sufficientforeign currency from other sources to fully discharge its obligations under the Bonds. See ‘‘RiskFactors – Risks relating to the Guarantee and the Bonds – There may be uncertainties relating to theperformance of obligations under the Guarantee."
Any payment by the Guarantor under the Guarantee in respect of premium and interest under the Bondswill be subject to withholding taxes in the PRC at a rate up to 10 per cent., subject to the application ofany relevant income tax treaty that the PRC has entered into, as such payments of premium and interestwill be regarded as being derived from sources within the PRC. See ‘‘Taxation – PRC’’. The Guarantoris obliged under the Conditions of the Bonds to pay such additional amounts as will result in receipt bythe Bondholders of such amounts as would have been received by them had no such withholding beenrequired.
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THE SHAREHOLDING STRUCTURE OF THE GUARANTOR
The Guarantor is a private company wholly-owned by its employees. Its shareholders are the Union andMr. Ren Zhengfei. The Guarantor implements the Scheme through the Union. As at 31 December 2014,there were 82,471 employees participating in the Scheme, which aligns employee contributions with thecompany’s long-term development, fostering Huawei’s continued success. Mr. Ren Zhengfei is theindividual shareholder of the Guarantor and also participates in the Scheme. As at 31 December 2014,Mr. Ren Zhengfei’s investments (including those held directly by himself and through the Union)accounted for nearly 1.4% of the Guarantor’s total share capital. The portion of the Scheme held by anysingle employee does not and is not allowed to exceed 2.0%.
According to the Company Law of the PRC and the articles of association of the Guarantor, theshareholders’ meeting is comprised of all shareholders – the Union and Mr. Ren Zhengfei. Theshareholders’ meetings are primarily responsible for:
• determining the business strategy and investment plans of the Guarantor;
• approving the Guarantor’s financial budget;
• approving plans for profit distribution and recovery of losses;
• passing resolutions on the increase or decrease of its registered share capital and amendments tothe articles of association;
• appointing or replacing directors; and
• approving other significant events of the Guarantor.
All shareholders of the Guarantor exercise their voting rights at the shareholders’ meeting in proportionwith their shareholding. Resolutions on any increase or decrease of the Guarantor’s registered sharecapital, any divesture, merger, or dissolution plans, any change of corporate form and amendments tothe articles of association are required to be passed by shareholders representing at least two-thirds ofthe votes at the relevant shareholders’ meeting(s). Resolutions on other activities which shall be decidedat the shareholders’ meeting according to the articles of association of the Guarantor are required to bepassed by shareholders representing at least one-half of the votes at the relevant shareholders’meeting(s).
All active employees participating in the Scheme have the right to select representatives from the Unionto form the Commission to represent the Union. As at 31 December 2014, the Commission consists of51 representatives from the Union. Major issues requiring a decision of the Union (as the shareholder ofthe Guarantor), such as any increase in the share capital, profit distribution, selection of Directors andSupervisors, and amendments to the articles of association of the Guarantor, shall be primarily reviewedand decided by the Commission.
The eligibility criteria for an employee to participate in the Scheme depends on whether such employeeis an active key employee who has displayed excellent work performance. Any entitlement allocated tothe employees under the Scheme shall be determined by his or her job grade and performance.Employees participating in the Scheme are entitled to receive dividends and any relevant appreciation intheir allocated entitlement, as well as bear risks of any depreciation on such allocation. Employeesparticipating in the Scheme have no right of transfer or disposal in its allocated entitlement. Except forcertain prescribed situations (for example, employees who are permitted to retire upon meeting certainrequirements), in the event of any termination of service of an employee, such employee is required tosecede from the Scheme.
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TAXATION
The following summary of certain tax consequences of the purchase, ownership and disposition of theBonds is based upon applicable laws, regulations, rulings and decisions in effect as at the date of thisOffering Circular, all of which are subject to change (possibly with retroactive effect). This discussiondoes not purport to be a comprehensive description of all the tax considerations that may be relevant toa decision to purchase, own or dispose of the Bonds and does not purport to deal with consequencesapplicable to all categories of investors, some of which may be subject to special rules. Neither thesestatements nor any other statements in this Offering Circular are to be regarded as advice on the taxposition of any holder of the Bonds or any persons acquiring, selling or otherwise dealing in the Bondsor on any tax implications arising from the acquisition, sale or other dealings in respect of the Bonds.Persons considering the purchase of the Bonds should consult their own tax advisers concerning thepossible tax consequences of buying, holding or selling any Bonds under the laws of their country ofcitizenship, residence or domicile.
PRC
The following summary describes the principal PRC tax consequences of ownership of the Bonds bybeneficial owners who, or which, are not residents of China for PRC tax purposes. These beneficialowners are referred to as non-PRC Bondholders in this section. In considering whether to invest in theBonds, investors should consult their individual tax advisors with regard to the application of PRC taxlaws to their particular situation as well as any tax consequences arising under the laws of any other taxjurisdiction. Reference is made to PRC taxes imposed in the taxable year beginning on or after 1January 2008.
Pursuant to the EIT Law and its implementation regulations, enterprises that are established under thelaws of foreign countries and regions (including Hong Kong, Macau and Taiwan) but whose ‘‘de factomanagement bodies’’ are within the territory of China shall be treated as PRC tax resident enterprisesfor the purpose of the EIT Law and they are required to pay enterprise income tax at the rate of 25 percent. in respect of their income sourced from both within and outside China. The implementing rules ofthe EIT Law define ‘‘de facto management’’ as ‘‘substantial and overall management and controlover the production and operations, personnel, accounting, and properties’’ of the enterprise. Acircular issued by the State Administration of Taxation on 22 April 2009 provides that a foreignenterprise controlled by a PRC enterprise or a PRC enterprise group will be treated as a ‘‘residententerprise’’ with a ‘‘de facto management body’’ located within the PRC if all of the followingrequirements are satisfied at the same time: (i) the senior management and core managementdepartments in charge of daily operations are located mainly within the PRC; (ii) financial and humanresources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) majorassets, accounting books, company seals and minutes and files of board and shareholders’ meetings arelocated or kept within the PRC; and (iv) at least half of the enterprise’s directors with voting rights orsenior management reside within the PRC. However, it is still unclear how the PRC tax authorities willdetermine whether an entity will be classified as a PRC tax resident enterprise. If the relevant PRC taxauthorities decide, in accordance with applicable tax rules and regulations, that the ‘‘de factomanagement body’’ of the Issuer is within the territory of the PRC, the Issuer may be held to be a PRCtax resident enterprise for the purpose of the EIT Law and be subject to enterprise income tax at the rateof 25 per cent. for its income sourced from both within and outside the PRC. As confirmed by theIssuer, as of the date of this Offering Circular, the Issuer has not been given notice or informed by thePRC tax authorities that it is considered as a PRC tax resident enterprise for the purpose of the EITLaw. On that basis, holders of the Bonds will not be subject to withholding tax, income tax or any othertaxes or duties (including stamp duty) imposed by any governmental authority in the PRC in respect ofthe holding of the Bonds or any repayment of principal and payment of interest made thereon.
However, there is no assurance that the Issuer will not be treated as a PRC tax resident enterprise underthe EIT Law and related implementation regulations in the future. Accordingly, in the event the Issuer isdeemed to be a PRC tax resident enterprise by the PRC tax authorities in the future, interest payable to
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‘‘non-resident enterprise’’ holders of the Bonds and capital gains realised by ‘‘non-residententerprise’’ holders of Bonds may be treated as income derived from sources within China and besubject to PRC withholding tax at a rate of 10 per cent., or a lower rate for holders who qualify for thebenefits of a double-taxation treaty with China. However, despite the potential withholding of PRC taxby the Issuer, the Issuer has agreed to pay additional amounts to ‘‘non-resident enterprise’’ holders ofthe Bonds so that holders of the Bonds would receive the full amount of the scheduled payment, asfurther set out in ‘‘Conditions of the Bonds’’.
In addition, in the event that the Guarantor is required to discharge its obligations under the Guarantee,the Guarantor will be obliged to withhold PRC enterprise income tax at the rate up to 10 per cent.,subject to the application of any relevant income tax treaty that the PRC has entered into, on thepayments of interest made by it under the Guarantee to non-PRC resident enterprise Bondholders assuch interest payment obligations will be regarded as being derived from sources within the PRC. To theextent that the PRC has entered into arrangements relating to the avoidance of double-taxation with anyjurisdiction, such as Hong Kong, that allow a lower rate of withholding tax, such lower rate may applyto qualified non-PRC resident enterprise Bondholders. Nevertheless, repayment of the principal will notbe subject to PRC withholding tax.
Non-PRC Bondholders will not be subject to the PRC tax on any capital gains derived from a sale orexchange of Bonds consummated outside mainland China between non-PRC Bondholders, excepthowever, if the Issuer is treated as a PRC tax resident enterprise under the New Enterprise Income TaxLaw and related implementation regulations in the future, any gain realised by the non-PRC enterpriseBondholders from the transfer of the Bonds may be regarded as being derived from sources within thePRC and accordingly would be subject to PRC withholding tax at a rate of up to 10 per cent., subject tothe application of any relevant income tax treaty that the PRC has entered into.
No PRC stamp duty will be chargeable upon the issue or transfer (for so long as the register ofBondholders is maintained outside China) of a Bond.
Hong Kong
Withholding tax
No withholding tax is payable in Hong Kong in respect of payments of principal or interest in respect ofthe Bonds or in respect of any capital gains arising from the sale of the Bonds.
Profits tax
Hong Kong profits tax is chargeable on every person carrying on a trade, profession or business in HongKong in respect of profits arising in or derived from Hong Kong from such trade, profession or business(excluding profits arising from the sale of capital assets).
Under the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (the ‘‘Inland RevenueOrdinance’’) as it is currently applied by the Inland Revenue Department, interest on the Bonds may bedeemed to be profits arising in or derived from Hong Kong from a trade, profession or business carriedon in Hong Kong in the following circumstances:
(a) interest on the Bonds is received by or accrues to a financial institution (as defined in the InlandRevenue Ordinance) and arises through or from the carrying on by the financial institution of itsbusiness in Hong Kong; or
(b) interest on the Bonds is derived from Hong Kong and is received by or accrues to a company(other than a financial institution) carrying on a trade, profession or business in Hong Kong; or
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(c) interest on the Bonds is derived from Hong Kong and is received by or accrues to a person (otherthan a company) carrying on a trade, profession or business in Hong Kong and is in respect of thefunds of the trade, profession or business.
Sums derived from the sale, disposal or redemption of the Bonds will be subject to Hong Kong profitstax where received by or accrued to a person who carries on a trade, profession or business in HongKong and the sum has a Hong Kong source.
Sums received by or accrued to a financial institution by way of gains or profits arising through or fromthe carrying on by the financial institution of its business in Hong Kong from the sale, disposal andredemption of the Bonds will be subject to profits tax.
Stamp duty
No Hong Kong stamp duty will be chargeable upon the issue of the Bonds. Stamp duty may be payableon a transfer of the Bonds if the relevant transfer is required to be registered in Hong Kong, but stampduty will not be payable if the Bonds constitute loan capital (as defined in the Stamp Duty Ordinance(Cap.117 of the Laws of Hong Kong) (‘‘Stamp Duty Ordinance’’)). The Bonds, under the present termsand conditions, constitute loan capital (as defined in the Stamp Duty Ordinance) and accordingly noHong Kong stamp duty will be chargeable upon the issue, transfer or exchange of the Bonds.
Estate duty
No Hong Kong estate duty is payable in respect of the Bonds.
EU directive on the taxation of savings income
Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State isrequired to provide to the tax authorities of another Member State details of payments of interest orother similar income paid by a person within its jurisdiction to, or collected by such a person for, anindividual resident or certain limited types of entity established in that other Member State; however, fora transitional period, Austria may instead apply a withholding system in relation to such payments,deducting tax at a rate of 35 per cent. The transitional period is to terminate at the end of the first fullfiscal year following agreement by certain non-EU countries to the exchange of information relating tosuch payments.
A number of non-EU countries and certain dependent or associated territories of certain Member States,have adopted similar measures (either provision of information or transitional withholding) in relation topayments made by a person within its jurisdiction to, or collected by such a person for, an individualresident or certain limited types of entity established in a Member State. In addition, the Member Stateshave entered into provision of information or transitional withholding arrangements with certain of thosedependent or associated territories in relation to payments made by a person in a Member State to, orcollected by such a person for, an individual resident or certain limited types of entity established in oneof those territories.
The Council of the European Union formally adopted a Council Directive amending the Directive on 24March 2014 (the ‘‘Amending Directive’’). The Amending Directive broadens the scope of therequirements described above. Member States have until 1 January 2016 to adopt the national legislationnecessary to comply with the Amending Directive. The changes made under the Amending Directiveinclude extending the scope of the Directive to payments made to, or collected for, certain other entitiesand legal arrangements. They also broaden the definition of ‘‘interest payment’’ to cover income that isequivalent to interest.
However, the European Commission has proposed the repeal of the Savings Directive from 1 January2017 in the case of Austria and from 1 January 2016 in the case of all other Member States (subject toon-going requirements to fulfil administrative obligations such as the reporting and exchange of
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information relating to, and accounting for withholding taxes on, payments made before those dates).This is to prevent overlap between the Savings Directive and a new automatic exchange of informationregime to be implemented under Council Directive 2011/16/EU on Administrative Cooperation in thefield of Taxation (as amended by Council Directive 2014/107/EU). The proposal also provides that, if itproceeds, Member States will not be required to apply the new requirements of the Amending Directive
Investors who are in any doubt as to their position should consult their professional advisers.
Proposed EU Directive for a Financial Transactions Tax
On 14 February 2013, the European Commission published a proposal (the ‘‘Commission’s Proposal’’)for a Directive for a common financial transactions tax (‘‘FTT’’) in Belgium, Germany, Estonia, Greece,Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the ‘‘participating Member States’’).
The Commission’s Proposal has very broad scope and could, if introduced, apply to certain dealings inthe Bonds (including secondary market transactions) in certain circumstances. The issuance andsubscription of Bonds should, however, be exempt.
Under the Commission’s Proposal, the FTT could apply in certain circumstances to persons both withinand outside of the participating Member States. Generally, it would apply to certain dealings in theBonds where at least one party is a financial institution, and at least one party is established in aparticipating Member State. A financial institution may be, or be deemed to be, ‘‘established’’ in aparticipating Member State in a broad range of circumstances, including (a) by transacting with a personestablished in a participating Member State or (b) where the financial instrument which is subject to thedealings is issued in a participating Member State.
Joint statements issued by participating Member States indicate an intention to implement the FTT by 1January 2016.
However, the FTT proposal remains subject to negotiation between the participating Member States andthe scope of any such tax is uncertain. Additional EU Member States may decide to participate.
Prospective Bondholders are advised to seek their own professional advice in relation to the FTT.
FATCA
FATCA imposes a US federal withholding tax of 30 per cent. on certain payments to certain non-USentities unless various US information reporting and due diligence requirements (generally relating toownership by US persons of certain interests in or accounts with those entities) have been satisfied. Thescope of FATCA, as enacted, is not entirely clear, and future US Treasury regulations may be issuedthat broaden or change the scope of FATCA. Under current guidance, withholding under FATCA wouldnot apply to payments on Bonds that are issued prior to the date that is six months after the date onwhich the final regulations that define ‘‘foreign passthru payments’’ are published, unless the Bonds arematerially modified after such date or are characterised as equity for US federal income tax purposes.
A tax for withholding may be payable under FATCA if an investor or custodian of the Bonds is unableto receive payments free of withholding. Whilst the Bonds are in global form and held within theClearing Systems, it is expected that FATCA will not affect the amount of any payments made under, orin respect of, the Bonds by the Issuer, the Guarantor, any paying agent and the common depositary,given that each of the entities in the payment chain between the Issuer and the participants in theClearing Systems is a major financial institution whose business is dependent on compliance withFATCA and that any alternative approach introduced under an intergovernmental agreement will beunlikely to affect the Bonds. The documentation expressly contemplates the possibility that the Bondsmay go into definitive form and therefore that they may be taken out of the Clearing Systems and also
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provides for the issuance of Bearer Bonds. If either of these were to happen, then a non-FATCAcompliant holder could be subject to withholding. However, definitive Bonds will only be printed inremote circumstances.
If an amount in respect of FATCA were to be deducted or withheld from any payments on or withrespect to the Bonds, neither the Issuer nor the Guarantor would have any obligation to pay additionalamounts or otherwise indemnify a holder or investor for any such withholding or deduction by theIssuer, the Guarantor, a Paying Agent or any other party as a result of the deduction or withholding ofsuch amount. As a result, if FATCA withholding is imposed on such payments, investors may receiveless interest or principal than expected, and would need to pursue a refund of any excess amountswithheld from the US Internal Revenue Service. Investors should consult their own tax advisers toobtain a more detailed explanation of FATCA and how FATCA may affect them.
British Virgin Islands
As the Issuer is incorporated under the BVI Business Companies Act 2004 (as amended) of the BritishVirgin Islands, (i) payment of principal and interest in respect of the Bonds will not be subject totaxation in the British Virgin Islands, (ii) no withholding tax will be required to be deducted by theIssuer on such payments to any holder of a Bond and (iii) the Bonds will not be liable to stamp duty inthe British Virgin Islands. Gains derived from the sale of Bonds will not be subject to British VirginIslands income tax. A Holder of a Bond who is a non-resident of the British Virgin Islands will not besubject to estate or gift taxes with respect to the Bonds.
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SUBSCRIPTION AND SALE
The Issuer and the Guarantor have entered into a subscription agreement with Australia and NewZealand Banking Group Limited, Bank of China (Hong Kong) Limited, DBS Bank Ltd., ING BankN.V., Singapore Branch and Standard Chartered Bank (the ‘‘Joint Lead Managers’’) dated 12 May2015 (the ‘‘Subscription Agreement’’), pursuant to which and subject to certain conditions containedtherein, the Issuer has agreed to sell to the Joint Lead Managers, which have severally, but not jointly,agreed to subscribe and pay for, or to procure subscribers to subscribe and pay for, the aggregateprincipal amount of the Bonds.
The Subscription Agreement provides that the Issuer and the Guarantor will jointly and severallyindemnify the Joint Lead Managers against certain liabilities in connection with the offer and sale of theBonds. The Subscription Agreement provides that the obligations of the Joint Lead Managers are subjectto certain conditions precedent and entitles the Joint Lead Managers to terminate the SubscriptionAgreement in certain circumstances prior to payment being made to the Issuer.
The Joint Lead Managers and certain of their subsidiaries and affiliates may have performed certaininvestment banking and advisory services for, and entered into certain commercial banking transactionswith the Issuer, the Guarantor or any member of the Group and/or their respective subsidiaries andaffiliates, from time to time, for which they have received customary fees and expenses. The Joint LeadManagers and their subsidiaries or affiliates may, from time to time, engage in transactions with andperform services for the Issuer, the Guarantor or any member of the Group and/or their respectivesubsidiaries and affiliates in the ordinary course of their business.
The Joint Lead Managers and their respective subsidiaries affiliates are full service financial institutionsengaged in various activities, which may include securities trading, commercial and investment banking,financial advisory, investment management, principal investment, hedging, financing and brokerageactivities. The Joint Lead Managers and their respective affiliates have, from time to time, performed,and may in the future perform, various financial advisory and investment banking services for the Issuer,the Guarantor and/or the Group for which they received or will receive customary fees and expenses.
The Joint Lead Managers and their respective affiliates may purchase the Bonds and be allocated Bondsfor asset management and/or proprietary purposes but not with a view to distribution. References hereinto the Bonds being offered should be read as including any offering of the Bonds to the Joint LeadManagers and/or their affiliates acting in such capacity. In the ordinary course of their various businessactivities, the Joint Lead Managers and their respective affiliates may make or hold a broad array ofinvestments and actively trade debt and equity securities (or related derivative securities) and financialinstruments (including bank loans) for their own account and for the accounts of their customers andmay at any time hold long and short positions in such securities and instruments. Such investment andsecurities activities may involve securities and instruments of the Issuer. Such persons do not intend todisclose the extent of any such investment or transactions otherwise than in accordance with any legal orregulatory obligation to do so.
The distribution of this Offering Circular, or any offering material, and the offering, sale or delivery ofthe Bonds is restricted by law in certain jurisdictions. Therefore, persons who may come into possessionof this Offering Circular, or any offering material, are advised to consult with their own legal advisersas to what restrictions may be applicable to them and to observe such restrictions. This Offering Circularmay not be used for the purpose of an offer or invitation in any circumstances in which such offer orinvitation is not authorised.
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General
No action has been taken or will be taken in any jurisdiction that would permit a public offering of theBonds, or possession or distribution of this Offering Circular or any amendment or supplement theretoor any other offering or publicity material relating to the Bonds, in any country or jurisdiction whereaction for that purpose is required. The Group will have no responsibility for, and each Joint LeadManager will obtain any consent, approval or permission required by it for, the acquisition, offer, sale ordelivery by it of Bonds under the laws and regulations in force in any jurisdiction to which it is subjector in or from which it makes any acquisition, offer, sale or delivery of the Bonds. None of the JointLead Managers is authorised to make any representation or use any information in connection with theissue, subscription and sale of the Bonds, other than as contained in this Offering Circular or anyamendment or supplement thereto.
If a jurisdiction requires that the offering of the Bonds be made by a licensed broker or dealer and aJoint Lead Manager or any affiliate of that Joint Lead Managers is a licensed broker or dealer in thatjurisdiction, the offering of the Bonds shall be deemed to be made by that Joint Lead Manager or itsaffiliate on behalf of the Issuer in such jurisdiction.
United States
Each Joint Lead Manager has represented, warranted and undertaken to the Issuer and the Guarantor thatit has not offered or sold, and will not offer or sell, any Bonds constituting part of its allotment withinthe United States except in accordance with Rule 903 of Regulation S under the Securities Act and,accordingly, that neither it nor any of its affiliates (including any person acting on behalf of the JointLead Manager or any of its affiliates) has engaged or will engage in any directed selling efforts withrespect to the Bonds.
Terms used in the paragraph above have the meanings given to them by Regulation S under theSecurities Act.
United Kingdom
Each of the Joint Lead Managers has represented, warranted and undertaken that:
(a) it has complied and will comply with all applicable provisions of the Financial Services andMarkets Act 2000 (the ‘‘FSMA’’) with respect to anything done by it in relation to the Bonds in,from or otherwise involving the United Kingdom; and
(b) it has only communicated or caused to be communicated and will only communicate or cause to becommunicated any invitation or inducement to engage in investment activity (within the meaningof Section 21 of the FSMA) received by it in connection with the issue or sale of any Bonds incircumstances in which Section 21(1) of the FSMA does not apply to the Issuer or the Guarantor.
Hong Kong
Each of the Joint Lead Managers has represented, warranted and undertaken that:
(a) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, anyBonds other than (i) to ‘‘professional investors’’ as defined in the Securities and FuturesOrdinance (Cap. 571) of Hong Kong (‘‘SFO’’) and any rules made under that Ordinance; or (ii) inother circumstances which do not result in the document being a ‘‘prospectus’’ as defined in theCompanies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong orwhich do not constitute an offer to the public within the meaning of that Ordinance; and
(b) it has not issued or had in its possession for the purposes of issue, and will not issue or have in itspossession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement,invitation or document relating to the Bonds, which is directed at, or the contents of which are
138
likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under thesecurities laws of Hong Kong) other than with respect to Bonds which are or are intended to bedisposed of only to persons outside Hong Kong or only to ‘‘professional investors’’ as defined inthe SFO and any rules made under that Ordinance.
PRC
Each of the Joint Lead Managers has represented, warranted and agreed that the Bonds are not beingoffered or sold and may not be offered or sold, directly or indirectly, in the PRC (for such purposes, notincluding Hong Kong and Macau Special Administrative Regions or Taiwan), except as permitted by theSecurities Laws of the PRC.
Singapore
Each of the Joint Lead Managers has acknowledged that this Offering Circular has not been and will notbe registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Joint LeadManager has represented, warranted and undertaken that it has not offered or sold any Bonds or causedsuch Bonds to be made the subject of an invitation for subscription or purchase and will not offer or sellsuch Bonds or cause such Bonds to be made the subject of an invitation for subscription or purchase,and has not circulated or distributed, nor will it circulate or distribute, this Offering Circular or anyother document or material in connection with the offer or sale, or invitation for subscription orpurchase, of such Bonds, whether directly or indirectly, to persons in Singapore other than (i) to aninstitutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the‘‘SFA’’), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A),and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuantto, and in accordance with the conditions of, any other applicable provision of the SFA.
Where Bonds are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the solebusiness of which is to hold investments and the entire share capital of which is owned by one ormore individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investmentsand each beneficiary of the trust is an individual who is an accredited investor,
(c) securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rightsand interest (howsoever described) in that trust shall not be transferred within six months after thatcorporation or that trust has acquired the Bonds pursuant to an offer made under Section 275 ofthe SFA except:
(i) to an institutional investor or to a relevant person defined in Section 274(2) of the SFA, or toany person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of theSFA;
(ii) where no consideration is or will be given for the transfer;
(iii) where the transfer is by operation of law;
(iv) as specified in Section 276(7) of the SFA; or
(v) as specified in Regulation 32 of the Securities and Futures (Offer of Investments) (Shares andDebentures) Regulations 2005 of Singapore.
139
British Virgin Islands
Each Joint Lead Manager has represented, warranted and agreed that it has not made and will not makean invitation to any person resident in the British Virgin Islands to offer or sell the Bonds but the Bondsmay be acquired by British Virgin Islands persons who receive the offer of the Bonds outside of theBritish Virgin Islands and in a manner which does not contravene the laws of the jurisdiction in whichsuch offer is received.
140
GENERAL INFORMATION
1. Clearing Systems: The Bonds will be lodged and cleared through the Euroclear and Clearstream,Luxembourg under Common Code number 123327519 and the International SecuritiesIdentification Number for the Bonds is XS1233275194.
2. Authorisations: The Issuer has obtained all necessary consents, approvals and authorisations inconnection with the issue and performance of the Bonds. The issue of the Bonds was authorised byresolutions of the board of directors of the Issuer on 30 April 2015. The Guarantor has obtained allnecessary consents, approvals and authorisations in connection with the giving and performance ofthe Guarantee, provided however that, the Guarantor shall register the Guarantee with theShenzhen Branch of SAFE within 15 business days after the date of execution of the Guarantee.An application for registration in writing with supporting documents including the Guarantee shallbe submitted to the Shenzhen Branch of SAFE by the Guarantor, subject to a procedural review inrespect of its authenticity and regulatory compliance. If the Guarantor fails to register theGuarantee within the prescribed timeframe, at the time of making payments under the Guarantee,the Guarantor will not be able to purchase or remit foreign currency or Renminbi in order for theGuarantor to fulfil its payment obligations under the Guarantee. Upon the performance ordischarge of the obligations of the Guarantor, the Guarantor shall go through the registrationprocedures as required in accordance with the applicable PRC law and regulations. The Guarantorhas made a filing notifying the National Development and Reform Commission of the PRC of theterms of the Bonds and the Guarantee. The giving and performance of the Guarantee wasauthorised by the shareholders of the Guarantor on 29 January 2015.
3. No Material Adverse Change: There has been no material adverse change or developmentinvolving a prospective material adverse change in the financial condition, business, properties,shareholders’ equity or results of operations of the Issuer, the Guarantor or the Group since 31December 2014.
4. Litigation: Save as disclosed in this Offering Circular, neither the Issuer nor the Guarantor norany member of the Group is involved in any litigation or arbitration proceedings that are materialin the context of the Bonds nor is the Issuer or the Guarantor aware that any such proceedings arepending or threatened.
5. Listing of Bonds: Application will be made to the Hong Kong Stock Exchange for the listing of,and permission to deal in, the Bonds by way of debt issues to professional investors (as defined inthe SFO) only and such permission is expected to become effective on or about 20 May 2015.
6. Available Documents: Copies of the Guarantor’s audited consolidated financial statements as atand for the years ended 31 December 2013 and 2014, the Trust Deed, the Agency Agreement, theOffering Circular relating to the Bonds and the Articles of Association of the Issuer and theGuarantor will be available for inspection from the Issue Date at the principal office of theGuarantor in the PRC at Building No. 1, District B, Huawei Industrial Base, Bantian, LonggangDistrict, Shenzhen, China and on prior written request, at the principal place of business in HongKong of the Trustee and at the specified office of the Principal Paying Agent during normalbusiness hours, so long as any of the Bonds is outstanding.
Consolidated Financial Statements: The Guarantor’s consolidated financial statements as at andfor the years ended 31 December 2013 and 2014, which are included elsewhere in this OfferingCircular, have been audited by KPMG Huazhen, as stated in their report herein.
Certain comparative amounts with respect to the year ended 31 December 2013 included inHuawei’s 2014 Financial Statements have been restated. In 2014, the management of Huawei haddetermined that certain operating support activities in Huawei’s selling organisation, previouslyrecorded as selling expenses, would be more appropriately presented as administrative expenses,
141
and that the product management activities for product divisions, previously presented as sellingexpenses, should be changed to research and development expenses to more accurately reflect theirfunction. The management of Huawei also further determined that certain cash received fromcustomers would be more appropriately presented as advances received within other payables,rather than being offset against the receivables due from the same customers. Huawei’s seniormanagement also adjusted the segment reporting solution based on the development of thebusiness. The comparatives as at and for the year ended 31 December 2013 have been representedto comply with the presentation in 2014. These changes in presentation have had no impact onreported operating profit or net assets. For more details, please see note 40 to Huawei’s auditedconsolidated financial statements as at and for the year ended 31 December 2014 includedelsewhere in this Offering Circular. Huawei’s financial information as at and for the years ended31 December 2012 have not been restated to reflect such reclassifications, restatements oramendments. Therefore the consolidated financial information as at and for the year ended 31December 2012 are not directly comparable to Huawei’s consolidated financial information as atand for the years ended 31 December 2013 and 2014 contained in Huawei’s 2014 FinancialStatements contained herein. For more details, please see the section entitled ‘‘Risk Factors – Risksrelating to Huawei’s Business and Industry – Huawei’s financial information as at and for the yearended 31 December 2012 regarding certain aspects has not been restated and may not becomparable to Huawei’s financial information as at and for the years ended 31 December 2013 and2014 contained in Huawei’s 2014 Financial Statements’’. KPMG Huazhen have given and notwithdrawn their written consent to the reproduction of their auditors’ reports on the Guarantor’sFinancial Statements dated 31 December 2013 and 2014, respectively, in this Offering Circular andwith references to KPMG Huazhen in the form and context in which they appear. Their consentshould not be construed as in any way updating or re-issuing the aforementioned audit reports.
142
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Financial Statements of Huawei Investment & Holding Co., Ltd.for the year ended 31 December 2013
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statement of Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Profit or Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Financial Statements of Huawei Investment & Holding Co., Ltd.for the year ended 31 December 2014
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-72
Consolidated Statement of Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-74
Consolidated Statement of Profit or Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . . . . F-75
Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-76
Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-79
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-81
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-83
Note: The consolidated financial statements as of and for the year ended 31 December 2013 and 2014 set out herein have beenreproduced from the Guarantor’s annual reports for the year ended 31 December 2013 and 2014, including the page numbersand page references set forth in such reports. The consolidated financial statements have not been specifically prepared forthe inclusion in this Offering Circular.
F-1
INDEPENDENT AUDITORS’ REPORT TO THE BOARD OF DIRECTORS OF HUAWEIINVESTMENT & HOLDING CO., LTD.
We have audited the accompanying consolidated financial statements of Huawei Investment &Holding Co., Ltd. and its subsidiaries (the “Group”) set out on pages 2 to 70, which comprise theconsolidated statement of financial position as at 31 December 2013, the consolidated statements ofprofit or loss, profit or loss and other comprehensive income, changes in equity and cash flows for theyear then ended, and notes, comprising a summary of significant accounting policies and otherexplanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with International Financial Reporting Standards, and for such internal controlas management determines is necessary to enable the preparation of consolidated financial statementsthat are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on ouraudit. We conducted our audit in accordance with International Standards on Auditing. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the consolidated financial statements. The procedures selected depend on our judgement,including the assessment of the risks of material misstatement of the consolidated financial statements,whether due to fraud or error. In making those risk assessments, we consider internal control relevant tothe entity’s preparation and fair presentation of the consolidated financial statements in order to designaudit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the entity’s internal control. An audit also includes evaluating theappropriateness of accounting policies used and the reasonableness of accounting estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basisfor our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidatedfinancial position of the Group as at 31 December 2013, and of its consolidated financial performanceand its consolidated cash flows for the year then ended in accordance with International FinancialReporting Standards.
This report has been prepared solely for the information and use of the Board of Directors ofHuawei Investment & Holding Co., Ltd. It should not be relied upon by any other party for any otherpurpose and we expressly disclaim any liability or duty to any other party in this respect. It should not bedisclosed, referred to or quoted in whole or in part without our prior written consent.
KPMG Huazhen (Special General Partnership)Certified Public Accountants9th Floor, China Resources Building5001 Shennan East RoadShenzhen 518001, China
10 March 2014
1
F-2
Huawei Investment & Holding Co., Ltd.Consolidated Statement of Profit or Loss
for the year ended 31 December 2013
Note 2013 2012
RMB’000 RMB’000Restated(Note 4)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 239,025,010 220,198,344
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141,005,320) (132,511,877)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,019,690 87,686,467
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6(a) 2,064,542 2,913,555
Research and development expenses . . . . . . . . . . . . . . . . . . . . . (30,672,119) (29,746,683)
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,362,525) (28,336,742)
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,579,693) (10,330,734)
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6(b) (1,341,457) (1,527,417)
Operating profit before financing costs . . . . . . . . . . . . . . . . . . 29,128,438 20,658,446
Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,946,010 1,631,037
Finance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,888,762) (3,671,178)
Net finance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (3,942,752) (2,040,141)
Share of associates’ results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4,073 (472)
Share of joint ventures’ results . . . . . . . . . . . . . . . . . . . . . . . . . 17 (27,990) (236,162)
Profit before taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,161,769 18,381,671
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (4,158,752) (2,757,954)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,003,017 15,623,717
Attributable to:Equity holders of the Company . . . . . . . . . . . . . . . . . . . . . . . 20,919,275 15,608,244
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,742 15,473
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,003,017 15,623,717
The notes on pages 8 to 70 form part of these consolidated financial statements.
2
F-3
Huawei Investment & Holding Co., Ltd.Consolidated Statement of Profit or Loss and
Other Comprehensive Incomefor the year ended 31 December 2013
Note 2013 2012
RMB’000 RMB’000Restated(Note 4)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,003,017 15,623,717- - - - - - - - - - - - - - - - - - - - - - - -
Other comprehensive income for the year(after tax and reclassification adjustments) . . . . . . . . . . . . . 10
Items that will not be reclassified to profit or loss:Remeasurement of defined benefit obligations . . . . . . . . . . . . . (618,227) (243,791)
Items that are or may be reclassified to profit or loss:Net change in the fair value of available-for-sale securities . . . . 164,957 57,749
Exchange differences on translation of financial statements offoreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,573 37,117
394,530 94,866
Other comprehensive income for the year . . . . . . . . . . . . . . . . . . (223,697) (148,925)- - - - - - - - - - - - - - - - - - - - - - - -
Total comprehensive income for the year . . . . . . . . . . . . . . . . . 20,779,320 15,474,792
Attributable to:Equity holders of the Company . . . . . . . . . . . . . . . . . . . . . . . 20,693,494 15,459,483
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,826 15,309
Total comprehensive income for the year . . . . . . . . . . . . . . . . . 20,779,320 15,474,792
The notes on pages 8 to 70 form part of these consolidated financial statements.
3
F-4
Huawei Investment & Holding Co., Ltd.Consolidated Statement of Financial Position
at 31 December 2013
Note 31 December 31 December 1 January
2013 2012 2012
RMB’000 RMB’000 RMB’000Restated Restated(Note 4) (Note 4)
AssetsProperty, plant and equipment . . . . . . . . . . . . . 12 22,209,029 20,365,748 18,630,896
Long-term leasehold prepayments . . . . . . . . . . 13 2,761,112 2,360,926 2,222,759
Intangible assets . . . . . . . . . . . . . . . . . . . . . . 14 2,410,305 1,688,868 1,163,344
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3,342,717 3,388,790 217,759
Interest in associates . . . . . . . . . . . . . . . . . . . 16 269,736 243,079 229,171
Interest in joint ventures . . . . . . . . . . . . . . . . . 17 210,869 249,531 453,768
Other investments . . . . . . . . . . . . . . . . . . . . . 18 583,874 548,620 454,467
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . 19 11,576,567 9,805,326 9,094,688
Trade receivables . . . . . . . . . . . . . . . . . . . . . . 21 335,603 496,705 28,749
Other receivables . . . . . . . . . . . . . . . . . . . . . . 22 13,906 407,344 16,678
Other non-current assets . . . . . . . . . . . . . . . . . 32 973,915 982,758 1,158,457
Non-current assets . . . . . . . . . . . . . . . . . . . . 44,687,633 40,537,695 33,670,736- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Other investments . . . . . . . . . . . . . . . . . . . . . 18 8,544,966 4,468,807 5,149,320
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 20 24,928,931 22,236,525 26,435,634
Trade and bills receivable . . . . . . . . . . . . . . . . 21 65,533,625 59,829,031 55,330,144
Other receivables . . . . . . . . . . . . . . . . . . . . . . 22 14,438,023 15,406,821 16,070,549
Cash and cash equivalents . . . . . . . . . . . . . . . . 23 73,398,640 67,180,115 57,192,360
Assets held for sale . . . . . . . . . . . . . . . . . . . . 24 – 346,609 –
Current assets . . . . . . . . . . . . . . . . . . . . . . . 186,844,185 169,467,908 160,178,007- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 231,531,818 210,005,603 193,848,743
4
F-5
Huawei Investment & Holding Co., Ltd.Consolidated Statement of Financial Position
at 31 December 2013 (continued)
Note 31 December 31 December 1 January
2013 2012 2012
RMB’000 RMB’000 RMB’000Restated Restated(Note 4) (Note 4)
EquityPaid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 12,088,632 10,989,666 9,990,605
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . 38,550,545 33,693,113 29,277,266
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,676,022 10,873,552 9,243,194
Retained earnings . . . . . . . . . . . . . . . . . . . . . 19,891,507 19,491,850 17,762,727
Equity attributable to equity holders ofthe Company . . . . . . . . . . . . . . . . . . . . . . . 86,206,706 75,048,181 66,273,792
Non-controlling interests . . . . . . . . . . . . . . . . 59,410 (24,573) (45,473)
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . 86,266,116 75,023,608 66,228,319- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
LiabilitiesInterest-bearing loans and borrowings . . . . . . . 26 19,989,460 16,077,097 13,269,732
Defined benefit obligations . . . . . . . . . . . . . . . 30(b) 9,608,257 9,686,076 8,391,812
Deferred government grants . . . . . . . . . . . . . . 6(a) 2,746,397 2,218,256 1,857,315
Deferred tax liabilities . . . . . . . . . . . . . . . . . . 19 475,744 784,072 651,769
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 781,688 585,855 267,958
Non-current liabilities . . . . . . . . . . . . . . . . . 33,601,546 29,351,356 24,438,586- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Interest-bearing loans and borrowings . . . . . . . 26 3,043,280 4,676,932 7,057,393
Income tax payable . . . . . . . . . . . . . . . . . . . . 4,034,410 1,652,881 2,323,172
Trade and bills payable . . . . . . . . . . . . . . . . . . 27 31,980,480 40,272,300 38,049,466
Other payables . . . . . . . . . . . . . . . . . . . . . . . 28 67,888,360 55,379,343 52,216,378
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4,717,626 3,649,183 3,535,429
Current liabilities . . . . . . . . . . . . . . . . . . . . . 111,664,156 105,630,639 103,181,838- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 145,265,702 134,981,995 127,620,424- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Total equity and liabilities . . . . . . . . . . . . . . 231,531,818 210,005,603 193,848,743
Approved and authorised for issue by the board of directors on 10 March 2014.
)Sun Yafang Guo Ping ) Directors
)
The notes on pages 8 to 70 form part of these consolidated financial statements.
5
F-6
Huawei Investment & Holding Co., Ltd.Consolidated Statement of Changes in Equity
for the year ended 31 December 2013
Attributable to equity holders of the Company
Note
Registeredand paid-in
CapitalCapitalsurplus
Statutoryreserves
Exchangereserve
Fair Valuereserve
Otherreserves
Retainedearnings Total
Non-controlling
interestsTotal
equity
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Balance at 1 January 2012 . . . . . . . 9,990,605 29,277,266 10,886,471 (5,730) – (241,501) 16,366,681 66,273,792 (45,473) 66,228,319Impact of change in accounting policy . . 4 – – – – – (1,396,046) 1,396,046 – – –
Restated balance at 1 January 2012 . . . 9,990,605 29,277,266 10,886,471 (5,730) – (1,637,547) 17,762,727 66,273,792 (45,473) 66,228,319- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Changes in equity for 2012:Profit for the year (restated) . . . . . . 4 – – – – – – 15,608,244 15,608,244 15,473 15,623,717Other comprehensive income (restated) . 4 – – – 37,281 57,749 (243,791) – (148,761) (164) (148,925)
Total comprehensive income . . . . . . . – – – 37,281 57,749 (243,791) 15,608,244 15,459,483 15,309 15,474,792- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Capital injected . . . . . . . . . . . . 999,061 4,415,847 – – – – – 5,414,908 – 5,414,908Acquisition of non-controlling interests
without a change in control . . . . . . 25(g) – – – – – (11,370) – (11,370) 6,403 (4,967)Profit appropriations . . . . . . . . . . 25(d) – – 1,790,489 – – – (1,790,489) – – –Dividends approved in respect of
previous years . . . . . . . . . . . . 25(b) – – – – – – (12,088,632) (12,088,632) (812) (12,089,444)
Restated balance at 31 December 2012 . 10,989,666 33,693,113 12,676,960 31,551 57,749 (1,892,708) 19,491,850 75,048,181 (24,573) 75,023,608
Restated balance at 31 December 2012and 1 January 2013 . . . . . . . . . 10,989,666 33,693,113 12,676,960 31,551 57,749 (1,892,708) 19,491,850 75,048,181 (24,573) 75,023,608
Changes in equity for 2013:Profit for the year . . . . . . . . . . – – – – – 20,919,275 20,919,275 83,742 21,003,017Other comprehensive income . . . . . . – – – 227,489 164,957 (618,227) – (225,781) 2,084 (223,697)
Total comprehensive income . . . . . . . – – – 227,489 164,957 (618,227) 20,919,275 20,693,494 85,826 20,779,320- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Capital injected . . . . . . . . . . . . (i) 1,098,966 4,857,432 – – – – – 5,956,398 – 5,956,398Acquisition of non-controlling interests
without a change in control . . . . . . 25(g) – – – – – (289) – (289) (846) (1,135)Profit appropriations . . . . . . . . . . 25(d) – – 2,766,125 – – – (2,766,125) – – –Dividends approved in respect of
previous years . . . . . . . . . . . . 25(b) – – – – – – (15,495,429) (15,495,429) (997) (15,496,426)Transfer of remeasurement of defined
benefit obligations within equity . . . . 25(g) – – – – – 2,258,064 (2,258,064) – – –Share of an associate’s reserves movement . 25(g) – – – – – 4,351 – 4,351 – 4,351
Balance at 31 December 2013 . . . . . . 12,088,632 38,550,545 15,443,085 259,040 222,706 (248,809) 19,891,507 86,206,706 59,410 86,266,116
(i) According to the equity holder’s resolution dated 26 July 2013, the Union of Huawei Investment & Holding Co., Ltd. (the“Union”), the ultimate controlling party of the Company, injected cash of RMB5,956,398,000 into the Company in December2013. The Company increased its paid-in capital by RMB1,098,966,000 along with the Union’s cash injection.
The notes on pages 8 to 70 form part of these consolidated financial statements.
6
F-7
Huawei Investment & Holding Co., Ltd.Consolidated Statement of Cash Flowsfor the year ended 31 December 2013
Note 2013 2012
RMB’000 RMB’000Cash flows from operating activitiesCash receipts from customers . . . . . . . . . . . . . . . . . . . . . . . . . . 293,316,662 258,332,258
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . (269,597,954) (230,990,733)
Government grants received . . . . . . . . . . . . . . . . . . . . . . . . . . . 992,750 1,110,671
Pledged deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,862 (485,433)
Cash generated from operating activities . . . . . . . . . . . . . . . . . . 24,776,320 27,966,763
Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,222,743) (2,997,765)
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . 22,553,577 24,968,998- - - - - - - - - - - - - - - - - - - - - - - -
Cash flows from investing activitiesProceeds from sale of property, plant and equipment . . . . . . . . . . 1,049,070 819,113
Proceeds from sale of intangible assets . . . . . . . . . . . . . . . . . . . 25,930 –
Purchase and sale of wealth management products . . . . . . . . . . . . (2,790,695) 1,498,018
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,746 125,674
Proceeds from disposal of associates . . . . . . . . . . . . . . . . . . . . . 15,000 43,000
Proceeds from sale of available-for-sale equity securities . . . . . . . 40,644 –
Proceeds from sale of held-for-trading equity securities . . . . . . . . 13,029 –
Repayment from loans receivable . . . . . . . . . . . . . . . . . . . . . . . 58,354 427,835
Acquisition of available-for-sale equity securities . . . . . . . . . . . . – (52,765)
Acquisition of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . (37,750) (290,073)
Acquisition of property, plant and equipment . . . . . . . . . . . . . . . (5,256,996) (4,813,937)
Acquisition of intangible assets and long-term leaseholdprepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,077,207) (594,737)
Investment in associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000) (40,000)
Acquisition of subsidiaries, net of cash acquired . . . . . . . . . . . . . (168,429) (2,548,288)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (8,037,304) (5,426,160)- - - - - - - - - - - - - - - - - - - - - - - -
Cash flows from financing activitiesProceeds from capital contribution . . . . . . . . . . . . . . . . . . . . . . 5,956,398 5,414,908
Payment for acquisition of non-controlling interests . . . . . . . . . . (6,475) –
Proceeds from issuance of corporate bond . . . . . . . . . . . . . . . . . – 988,852
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,913,325 49,924,338
Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,850,697) (50,259,780)
Dividends paid to non-controlling interests . . . . . . . . . . . . . . . . . (812) (812)
Dividends paid to equity holders of the Company . . . . . . . . . . . . (15,176,002) (14,205,231)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (961,187) (1,041,759)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . (7,125,450) (9,179,484)- - - - - - - - - - - - - - - - - - - - - - - -
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . 7,390,823 10,363,354
Cash and cash equivalents at 1 January . . . . . . . . . . . . . . . . . . . 23 67,180,115 57,192,360
Effect of foreign exchange rate changes . . . . . . . . . . . . . . . . . . . (1,172,298) (375,599)
Cash and cash equivalents at 31 December . . . . . . . . . . . . . . . 23 73,398,640 67,180,115
The notes on pages 8 to 70 form part of these consolidated financial statements.
7
F-8
Huawei Investment & Holding Co., Ltd.Notes to the Consolidated Financial Statements
for the year ended 31 December 2013
1 Reporting entity
Huawei Investment & Holding Co., Ltd. (the “Company”) is a limited liability companyestablished in Shenzhen in the People’s Republic of China (the “PRC”). The Company’s registeredoffice is at Huawei Industrial Base, Bantian Longgang, Shenzhen, PRC.
The principal activities of the Company are the research and development, the production and saleof high technology products, investment holding, leasing of self-owned properties and provision ofInformation Technology services, management services, consultation services, training servicesand other related services. The principal activities and other particulars of the Company’s majorsubsidiaries are set out in note 38(b) to the consolidated financial statements.
2 Statement of compliance
These consolidated financial statements have been prepared in accordance with all applicableInternational Financial Reporting Standards (“IFRSs”), which collective term includes allapplicable individual IFRSs, International Accounting Standards (“IASs”) and Interpretationsissued by the International Accounting Standards Board (“IASB”).
The IASB has issued certain new and revised IFRSs that are first effective or available for earlyadoption for the current accounting period of the Company and its subsidiaries (together referredto as the “Group”). Note 4 provides information on any changes in accounting policies resultingfrom initial application of these developments to the extent that they are relevant to the Group forthe current and prior accounting periods reflected in these consolidated financial statements.
The Company has also prepared a separate set of consolidated financial statements which complywith the generally accepted accounting principles in the PRC.
3 Significant accounting policies
(a) Basis of preparation of the consolidated financial statements
The consolidated financial statements for the year ended 31 December 2013 comprise theCompany and its subsidiaries and the Group’s interest in associates and joint ventures.
The measurement basis used in the preparation of the consolidated financial statements is thehistorical cost basis except for financial instruments classified as available-for-sale orheld-for-trading, which are stated at their fair value as explained in the accounting policies set outin note 3(f).
Non-current assets held for sale are stated at the lower of carrying amount and fair value less coststo sell (see note3(u)).
The preparation of consolidated financial statements in conformity with IFRSs requiresmanagement to make judgments, estimates and assumptions that affect the application of policiesand reported amounts of assets, liabilities, income and expenses. The estimates and associatedassumptions are based on historical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis of making the judgmentsabout carrying values of assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates.
8
F-9
3 Significant accounting policies (continued)
(a) Basis of preparation of the consolidated financial statements (continued)
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised 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.
Judgments made by management in the application of IFRSs that have significant effect on the
consolidated financial statements and major sources of estimation uncertainty are discussed in
note 39.
(b) Functional and presentation currency
These consolidated financial statements are presented in Renminbi (“RMB”), which is the
Company’s functional currency. All amounts have been rounded to the nearest thousand.
(c) Business combinations and goodwill
The Group accounts for business combinations using the acquisition method when control is
transferred to the Group (see note 3(d)). The consideration transferred in the acquisition is
generally measured at fair value, as are the identifiable net assets acquired. Transaction costs are
expensed as incurred.
The consideration transferred does not include amounts related to the settlement of pre-existing
relationships. Such amounts generally are recognised in profit or loss.
Any contingent consideration payable is measured at fair value at the acquisition date. If the
contingent consideration is classified as equity, then it is not remeasured and settlement is
accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent
consideration are recognised in profit or loss.
Goodwill arising on a business combination represents the excess of:
(i) the aggregate of the fair value of the consideration transferred, the recognised amount of any
non-controlling interest in the acquiree and the fair value of the Group’s previously held
equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets acquired and liabilities assumed as at
the acquisition date.
When (ii) is greater than (i), then this excess is recognised immediately in profit or loss as a gain on
a bargain purchase.
Goodwill is stated at cost less accumulated impairment losses (see note 3(l)). Goodwill is allocated
to each cash-generating unit, or groups of cash generating units, that is expected to benefit from the
synergies of the combination and is tested annually for impairment (see note 3(l)).
9
F-10
3 Significant accounting policies (continued)
(d) Subsidiaries and non-controlling interests
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed,
or has rights, to variable returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity. When assessing whether the Group has power, only
substantive rights (held by the Group and other parties) are considered.
An investment in a subsidiary is consolidated into the consolidated financial statements from the
date that control commences until the date that control ceases. Intra-group balances, transactions
and cash flows and any unrealised profits arising from intra-group transactions are eliminated in
full in preparing the consolidated financial statements. Unrealised losses resulting from
intra-group transactions are eliminated in the same way as unrealised gains but only to the extent
that there is no evidence of impairment.
Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly
to the Company, and in respect of which the Group has not agreed any additional terms with the
holders of those interests which would result in the Group as a whole having a contractual
obligation in respect of those interests that meets the definition of a financial liability. For each
business combination, the Group can elect to measure any non-controlling interests either at fair
value or at the non-controlling interests’ proportionate share of the subsidiary’s net identifiable
assets.
Non-controlling interests are presented in the consolidated statement of financial position within
equity, separately from equity attributable to the equity holders of the Company. Non-controlling
interests in the results of the Group are presented on the face of the consolidated statement of profit
or loss and the consolidated statement of profit or loss and other comprehensive income as an
allocation of the total profit or loss and total comprehensive income for the year between
non-controlling interests and the equity holders of the Company.
Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted
for as equity transactions, whereby adjustments are made to the amounts of controlling and
non-controlling interests within consolidated equity to reflect the change in relative interests, but
no adjustments are made to goodwill and no gain or loss is recognised.
When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest
in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest
retained in that former subsidiary at the date when control is lost is recognised at fair value and this
amount is regarded as the fair value on initial recognition of a financial asset (see note 3(f)) or,
when appropriate, the cost on initial recognition of an investment in an associate or joint venture
(see note 3(e)).
10
F-11
3 Significant accounting policies (continued)
(e) Associates and joint ventures
An associate is an entity in which the Group has significant influence, but not control or joint
control, over its management, including participation in the financial and operating policy
decisions.
A joint venture is an arrangement whereby the Group and other parties contractually agree to share
control of the arrangement, and have rights to the net assets of the arrangement.
An investment in an associate or a joint venture is accounted for in the consolidated financial
statements using the equity method. Under the equity method, the investment is initially recorded
at cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the
investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment
is adjusted for the post acquisition change in the Group’s share of the investee’s net assets and any
impairment loss relating to the investment (see notes 3(l)). Any acquisition-date excess over cost,
the Group’s share of the post-acquisition, post-tax results of the investees and any impairment
losses for the year are recognised in the consolidated statement of profit or loss, whereas the
Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income
is recognised in the consolidated statement of profit or loss and other comprehensive income.
When the Group’s share of losses equals or exceeds its interest in the associate or the joint venture,
the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the
extent that the Group has incurred legal or constructive obligations or made payments on behalf of
the investee. For this purpose, the Group’s interest is the carrying amount of the investment under
the equity method together with the Group’s long-term interests that in substance form part of the
Group’s net investment in the associate or the joint venture.
Unrealised profits and losses resulting from transactions between the Group and its associates and
joint ventures are eliminated to the extent of the Group’s interest in the investee, except where
unrealised losses provide evidence of an impairment of the asset transferred, in which case they are
recognised immediately in profit or loss.
If an investment in an associate becomes an investment in a joint venture or vice versa, retained
interest is not remeasured. Instead, the investment continues to be accounted for under the equity
method.
In other cases, when the Group ceases to have significant influence over an associate or joint
control over a joint venture, it is accounted for as a disposal of the entire interest in that investee,
with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former
investee at the date when significant influence or joint control is lost is recognised at fair value and
this amount is regarded as the fair value on initial recognition of a financial asset (see note 3(f)).
11
F-12
3 Significant accounting policies (continued)
(f) Financial instruments other than derivatives
Non-derivative financial assets of the Group comprise financial assets at fair value through profit
or loss, loans and receivables, cash and cash equivalents and available-for-sale financial assets.
Non-derivative financial liabilities of the Group comprise interest-bearing loans and borrowings,
and other financial liabilities.
(i) Recognition and derecognition
Non-derivative financial assets and financial liabilities are recognised in the consolidated
statement of financial position when the Group becomes a party to the contractual provisions of the
instrument.
The Group derecognises a financial asset when the contractual rights to the cash flows from the
asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which
substantially all of the risks and rewards of ownership of the financial asset are transferred, or it
neither transfers nor retains substantially all of the risks and rewards of ownership and does not
retain control over the transferred asset. Any interest in such derecognised financial assets that is
created or retained by the Group is recognised as a separate asset or liability. The Group
derecognises a financial liability when its contractual obligations are discharged, cancelled, or
expire.
Financial assets and financial liabilities are offset and the net amount presented in the consolidated
statement of financial position when, and only when, the Group has a legal right to offset the
amounts and intends either to settle them on a net basis or to realise the asset and settle the liability
simultaneously.
(ii) Measurement
– Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified as
held-for-trading or is designated as such on initial recognition. Directly attributable
transaction costs are recognised in profit or loss as incurred. At the end of each reporting
period the fair value is remeasured, with any resultant gain or loss being recognised in profit
or loss. The net gain or loss recognised in profit or loss does not include any dividends or
interest earned on these investments as these are recognised in accordance with the policies
set out in note 3(t).
– Loans and receivables
Loans and receivables are initially recognised at fair value and thereafter stated at amortised
cost less allowance for impairment of doubtful debts (see note 3(l)), except where the
receivables are interest-free loans made to related parties without any fixed repayment terms
or the effect of discounting would be immaterial. In such cases, the receivables are stated at
cost less allowance for impairment of doubtful debts.
12
F-13
3 Significant accounting policies (continued)
(f) Financial instruments other than derivatives (continued)
(ii) Measurement (continued)
– Loans and receivables (continued)
From time to time, the Group transfers its trade receivables to banks or financialinstitutions; the bank or the financial institutions fully bear the collection risk without theright to receive payments from the Group in the event a loss occurs due to thenon-collectibility of the receivables transferred. The Group’s customers make payments ofthe receivables transferred directly to the bank or the financial institutions. In such case,trade receivables transferred are derecognised from the consolidated statement of financialposition. The excess of the carrying amount of trade receivables over cash received from thebanks or financial institutions is included in “other operating expenses” in the consolidatedstatement of profit or loss.
– Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banksand other financial institutions, and short-term, highly liquid investments that are readilyconvertible into known amounts of cash and which are subject to an insignificant risk ofchanges in value, having been within three months of maturity at acquisition. Bankoverdrafts that are repayable on demand and form an integral part of the Group’s cashmanagement are also included as a component of cash and cash equivalents for the purposeof the consolidated statement of cash flows.
~ Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are not classifiedin any of the above categories of financial assets. Available-for-sale financial assets arerecognised initially at fair value plus any directly attributable transaction costs. At the endof each reporting period the fair value is remeasured, with any resultant gain or loss beingrecognised in other comprehensive income and accumulated separately in equity in the fairvalue reserve. As an exception to this, available-for-sale financial assets that do not have aquoted price in an active market for an identical instrument and whose fair value cannototherwise be reliably measured are recognised in the consolidated statement of financialposition at cost less impairment losses (see note 3(l)). Dividend income is recognised inprofit or loss in accordance with the policy set out in note 3(t) and, where these investmentsare interest-bearing, interest calculated using the effective interest method is recognised inprofit or loss in accordance with the policy set out in note 3(t).
When these assets are derecognised or impaired (see note 3(l)), the cumulative gain or lossis reclassified from equity to profit or loss.
– Interest-bearing loans and borrowings
Interest-bearing loans and borrowings are recognised initially at fair value less attributabletransaction costs. Subsequent to initial recognition, interest-bearing loans and borrowingsare stated at amortised cost with any difference between the amount initially recognised andredemption value being recognised in profit or loss over the period of the loans andborrowings, together with any interest and fees payable, using the effective interest method.
13
F-14
3 Significant accounting policies (continued)
(f) Financial instruments other than derivatives (continued)
(ii) Measurement (continued)
– Other financial liabilities
Trade and other payables are initially recognised at fair value and subsequently stated at
amortised cost unless the effect of discounting would be immaterial, in which case they are
stated at cost.
(g) Investment property
Investment properties are land and/or buildings which are owned or held under a leasehold interest
(see note 3(k)) to earn rental income and/or for capital appreciation.
Investment properties are stated at cost less accumulated depreciation (see note 3(h)(iii)) and
impairment losses (see note 3(l)). Depreciation is calculated to write off the cost of items of
investment property, less their estimated residual value, if any, using the straight line method over
their estimated useful lives. Rental income from investment properties is accounted for as
described in note 3(r)(iv).
(h) Other property, plant and equipment
(i) Recognition and measurement
Items of property, plant and equipment are stated at cost less accumulated depreciation and
impairment losses (see note 3(l)). Cost includes expenditure that is directly attributable to the
acquisition of the assets. The cost of self-constructed items of property, plant and equipment
includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of
dismantling and removing the items and restoring the site on which they are located, and an
appropriate proportion of production overheads and borrowing costs (see note 3(t)).
Construction in progress is transferred to other property, plant and equipment when it is ready for
its intended use.
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment
are determined as the difference between the net disposal proceeds and the carrying amount of the
item and are recognised in profit or loss on the date of retirement or disposal.
(ii) Subsequent costs
The cost of replacing part of an item of property, plant and equipment is recognised in the carrying
amount of the item if it is probable that the future economic benefits embodied within the part will
flow to the Group and its cost can be measured reliably. The carrying amount of the replaced
component is derecognised. The costs of the day-to-day servicing of property, plant and equipment
are recognised in profit or loss as incurred.
14
F-15
3 Significant accounting policies (continued)
(h) Other property, plant and equipment (continued)
(iii) Depreciation
Depreciation is calculated to write off the cost of items of property, plant and equipment, less their
estimated residual value, if any, using the straight line method over their estimated useful lives as
follows:
• Freehold land and construction in progress are not depreciated
• Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 years
• Machinery, electronic equipment and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years
• Motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years
• Decoration and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 5 years
Where parts of an item of property, plant and equipment have different useful lives, the cost or
valuation of the item is allocated on a reasonable basis between the parts and each part is
depreciated separately. Both the useful life of an item of property, plant and equipment and its
residual value, if any, are reviewed annually.
(i) Long-term leasehold prepayments
Long-term leasehold prepayments represent land premium, resettlement fees and related expenses
in obtaining the relevant land use rights. Long-term leasehold prepayments are stated at cost, less
accumulated amortisation and impairment losses (see note 3(l)).
Amortisation is charged to the consolidated statement of profit or loss on a straight-line basis over
the period of the land use rights which is generally not exceeding 50 years.
(j) Intangible assets
(i) Research and development
Research and development costs comprise all costs that are directly attributable to research and
development activities or that can be allocated on a reasonable basis to such activities. Because of
the nature of the Group’s research and development activities, the criteria for the recognition of
such costs as assets are generally not met until late in the development stage of the project when
the remaining development costs are immaterial. Hence both research costs and development costs
are generally recognised as expenses in profit or loss in the period in which they are incurred.
(ii) Other intangible assets
Other intangible assets that are acquired by the Group are stated at cost less accumulated
amortisation (where the estimated useful life is finite) and impairment losses (see note 3(l)).
15
F-16
3 Significant accounting policies (continued)
(j) Intangible assets (continued)
(iii) Amortisation
Amortisation of intangible assets with finite useful lives is charged to profit or loss on a
straight-line basis over the assets’ estimated useful lives. The following intangible assets with
finite useful lives are amortised from the date they are available for use and their estimated useful
lives are as follows:
• Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 years
• Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 22 years
• Trademark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 years
Both the period and method of amortisation are reviewed annually.
Intangible assets are not amortised while their useful lives are assessed to be indefinite. Any
conclusion that the useful life of an intangible asset is indefinite is reviewed annually to determine
whether events and circumstances continue to support the indefinite useful life assessment for that
asset. If they do not, the change in the useful life assessment from indefinite to finite is accounted
for prospectively from the date of change and in accordance with the policy for amortisation of
intangible assets with finite lives as set out above.
(k) Leased assets
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the
Group determines that the arrangement conveys a right to use a specific asset or assets for an
agreed period of time in return for a payment or a series of payments. Such a determination is made
based on an evaluation of the substance of the arrangement and is regardless of whether the
arrangement takes the legal form of a lease.
(i) Classification of assets leased to the Group
Assets that are held by the Group under leases which transfer to the Group substantially all the
risks and rewards of ownership are classified as being held under finance leases. Leases which do
not transfer substantially all the risks and rewards of ownership to the Group are classified as
operating leases.
(ii) Operating lease charges
Where the Group has the use of assets held under operating leases, payments made under the leases
are charged to profit or loss in equal instalments over the accounting periods covered by the lease
term, except where an alternative basis is more representative of the pattern of benefits to be
derived from the leased asset. Lease incentives received are recognised in profit or loss as an
integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or
loss in the accounting period in which they are incurred.
16
F-17
3 Significant accounting policies (continued)
(l) Impairment of assets
(i) Impairment of investments in debt and equity securities and other receivables
Investments in debt and equity securities and other current and non-current receivables that arestated at cost or amortised cost or are classified as available-for-sale securities are reviewed at theend of each reporting period to determine whether there is objective evidence of impairment.Objective evidence of impairment includes observable data that comes to the attention of theGroup about one or more of the following loss events:
– significant financial difficulty of the debtor;
– a breach of contract, such as a default or delinquency in interest or principal payments;
– it becoming probable that the debtor will enter bankruptcy or other financial reorganisation;
– significant changes in the technological, market, economic or legal environment that havean adverse effect on the debtor; and
– a significant or prolonged decline in the fair value of an investment in an equity instrumentbelow its cost.
If any such evidence exists, any impairment loss is determined and recognised as follows:
– For investments in associates and joint ventures accounted for under the equity method (seenote 3(e)), the impairment loss is measured by comparing the recoverable amount of theinvestment with its carrying amount in accordance with note 3(l)(ii). The impairment loss isreversed if there has been a favourable change in the estimates used to determine therecoverable amount in accordance with note 3(l)(ii).
– For unquoted equity securities carried at cost, the impairment loss is measured as thedifference between the carrying amount of the financial asset and the estimated future cashflows, discounted at the current market rate of return for a similar financial asset where theeffect of discounting is material. Impairment losses for equity securities carried at cost arenot reversed.
– For trade and other current receivables and other financial assets carried at amortised cost,the impairment loss is measured as the difference between the asset’s carrying amount andthe present value of estimated future cash flows, discounted at the financial assets’ originaleffective interest rate (i.e. the effective interest rate computed at initial recognition of theseassets), where the effect of discounting is material. This assessment is made collectivelywhere these financial assets share similar risk characteristics, such as similar past duestatus, and have not been individually assessed as impaired. Future cash flows for financialassets which are assessed for impairment collectively are based on historical loss experiencefor assets with credit risk characteristics similar to the collective group.
If in a subsequent period the amount of an impairment loss decreases and the decrease canbe linked objectively to an event occurring after the impairment loss was recognised, theimpairment loss is reversed through profit or loss. A reversal of an impairment loss shall notresult in the asset’s carrying amount exceeding that which would have been determined hadno impairment loss been recognised in prior years.
17
F-18
3 Significant accounting policies (continued)
(l) Impairment of assets (continued)
(i) Impairment of investments in debt and equity securities and other receivables (continued)
– For available-for-sale securities, the cumulative loss that has been recognised in the fair
value reserve is reclassified to profit or loss. The amount of the cumulative loss that is
recognised in profit or loss is the difference between the acquisition cost (net of any
principal repayment and amortisation) and current fair value, less any impairment loss on
that asset previously recognised in profit or loss.
Impairment losses recognised in profit or loss in respect of available-for-sale equity
securities are not reversed through profit or loss. Any subsequent increase in the fair value of
such assets is recognised in other comprehensive income.
Impairment losses in respect of available-for-sale debt securities are reversed if the
subsequent increase in fair value can be objectively related to an event occurring after the
impairment loss was recognised. Reversals of impairment losses in such circumstances are
recognised in profit or loss.
Impairment losses are written off against the corresponding assets directly, except for
impairment losses recognised in respect of trade and bills receivable, whose recovery is
considered doubtful but not remote. In this case, the impairment losses for doubtful debts
are recorded using an allowance account. When the Group is satisfied that recovery is
remote, the amount considered irrecoverable is written off against trade and bills receivable
directly and any amounts held in the allowance account relating to that debt are reversed.
Subsequent recoveries of amounts previously charged to the allowance account are reversed
against the allowance account. Other changes in the allowance account and subsequent
recoveries of amounts previously written off directly are recognised in profit or loss.
(ii) Impairment of other assets
Internal and external sources of information are reviewed at the end of each reporting period to
identify indications that the following assets may be impaired or, except in the case of goodwill, an
impairment loss previously recognised no longer exists or may have decreased:
– investment property and other property, plant and equipment;
– long-term leasehold prepayments;
– other long-term deferred assets;
– intangible assets; and
– goodwill
If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill,
intangible assets that are not yet available for use and intangible assets that have indefinite useful
lives, the recoverable amount is estimated annually whether or not there is any indication of
impairment.
18
F-19
3 Significant accounting policies (continued)
(l) Impairment of assets (continued)
(ii) Impairment of other assets (continued)
– Calculation of recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal 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
time value of money and the risks specific to the asset. Where an asset does not generate
cash inflows largely independent of those from other assets, the recoverable amount is
determined for the smallest group of assets that generates cash inflows independently (i.e. a
cash-generating unit).
– Recognition of impairment losses
An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the
cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses
recognised in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to
reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata
basis, except that the carrying value of an asset will not be reduced below its individual fair
value less costs of disposal (if measureable) or value in use (if determinable).
– Reversals of impairment losses
In respect of assets other than goodwill, an impairment loss is reversed if there has been a
favourable change in the estimates used to determine the recoverable amount. An
impairment loss in respect of goodwill is not reversed.
A reversal of an impairment loss is limited to the asset’s carrying amount that would have
been determined had no impairment loss been recognised in prior years. Reversals of
impairment losses are credited to profit or loss in the year in which the reversals are
recognised.
(m) Inventories
Inventories are carried at the lower of cost and net realisable value.
Cost is calculated using the standard cost method with periodical adjustments of cost variance to
arrive at the actual cost, which approximates weighted average cost formula. The cost of
inventories includes expenditures incurred in acquiring the inventories and bringing them to their
present location and condition. In the case of manufactured inventories and work in progress, cost
includes an appropriate share of overheads based on normal operating capacity.
Net realisable value is 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.
19
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3 Significant accounting policies (continued)
(m) Inventories (continued)
When inventories are sold, the carrying amount of those inventories is recognised as an expense in
the period in which the related revenue is recognised. The amount of any write-down of inventories
to net realisable value and all losses of inventories are recognised as an expense in the period the
write-down or loss occurs. The amount of any reversal of any write-down of inventories is
recognised as a reduction in the amount of inventories recognised as an expense in the period in
which the reversal occurs.
(n) Construction contracts
Construction contracts are contracts specifically negotiated with a customer for the construction of
an asset or a group of assets, where the customer is able to specify the major structural elements of
the design. The accounting policy for contract revenue is set out in note 3(r)(ii). When the outcome
of a construction contract can be estimated reliably, contract costs are recognised as an expense by
reference to the stage of completion of the contract at the end of the reporting period. When it is
probable that total contract costs will exceed total contract revenue, the expected loss is recognised
as an expense immediately. When the outcome of a construction contract cannot be estimated
reliably, contract costs are recognised as an expense in the period in which they are incurred.
Construction contracts in progress at the end of the reporting period are recorded at the net amount
of costs incurred plus recognised profit less recognised losses and progress billings, and are
presented in the consolidated statement of financial position as “gross amount due from third-party
customers for contract works” (as an asset) or “gross amount due to third-party customers for
contract works” (as a liability), as applicable. Progress billings not yet paid by the customer are
included under “other receivables”. Amounts received before the related work is performed are
included under “other payables”.
(o) Employee benefits
(i) Short term employee benefits and contributions to defined contribution retirement plans
Salaries, annual bonuses, paid annual leave and contributions to defined contribution retirement
plans are accrued in the year in which the associated services are rendered by employees. Where
payment or settlement is deferred and the effect would be material, these amounts are stated at
their present values.
(ii) Defined benefit obligations
The Group’s obligation in respect of defined benefit plans is calculated separately for each plan by
estimating the amount of future benefit that employees have earned in return for their service in the
current and prior periods; that benefit is discounted to determine the present value. The calculation
is performed by management using the projected unit credit method.
20
F-21
3 Significant accounting policies (continued)
(o) Employee benefits (continued)
(ii) Defined benefit obligations (continued)
Service cost and interest cost on the defined benefit obligations are recognised in profit or loss.Service cost is allocated by function as part of “cost of sales”, “research and developmentexpenses”, “selling expenses” or “administrative expenses”. Current service cost is measured asthe increase in the present value of the defined benefit obligations resulting from employee servicein the current period. When the benefits of a plan are changed, or when a plan is curtailed, theportion of the changed benefit related to past service by employees, or the gain or loss oncurtailment, is recognised as an expense in profit or loss at the earlier of when the plan amendmentor curtailment occurs and when related restructuring costs or termination benefits are recognised.Interest cost on defined benefit obligations for the period is determined by applying the discountrate used to measure the defined benefit obligation at the beginning of the reporting period to thedefined benefit obligations. The discount rate is the yield at the end of the reporting period on highquality corporate bonds that have maturity dates approximating the terms of the Group’sobligations.
Remeasurements arising from defined benefit plans are recognised immediately in othercomprehensive income and shall not be reclassified to profit or loss in a subsequent period.However, the remeasurement amounts recognised in other comprehensive income may betransferred within equity. Remeasurements include actuarial gains and losses.
(p) Income tax
Income tax for the year comprises current tax and movements in deferred tax assets and liabilities.Current tax and movements in deferred tax assets and liabilities are recognised in profit or lossexcept to the extent that they relate to items recognised in other comprehensive income or directlyin equity, in which case the relevant amounts of tax are recognised in other comprehensive incomeor directly in equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enactedor substantively enacted at the end of the reporting period, and any adjustment to tax payable inrespect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differencesrespectively, being the differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and their tax bases. Deferred tax assets also arise from unused taxlosses and unused tax credits.
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to theextent that it is probable that future taxable profits will be available against which the asset can beutilised, are recognised. Future taxable profits that may support the recognition of deferred taxassets arising from deductible temporary differences include those that will arise from the reversalof existing taxable temporary differences, provided those differences relate to the same taxationauthority and the same taxable entity, and are expected to reverse either in the same period as theexpected reversal of the deductible temporary difference or in periods into which a tax loss arisingfrom the deferred tax asset can be carried back or forward. The same criteria are adopted whendetermining whether existing taxable temporary differences support the recognition of deferredtax assets arising from unused tax losses and credits, that is, those differences are taken intoaccount if they relate to the same taxation authority and the same taxable entity, and are expectedto reverse in a period, or periods, in which the tax loss or credit can be utilised.
21
F-22
3 Significant accounting policies (continued)
(p) Income tax (continued)
The limited exceptions to recognition of deferred tax assets and liabilities are those temporary
differences arising from the initial recognition of goodwill, the initial recognition of assets or
liabilities that affect neither accounting nor taxable profit (provided they are not part of a business
combination), and temporary differences relating to investments in subsidiaries to the extent that,
in the case of taxable differences, the Group controls the timing of the reversal and it is probable
that the differences will not reverse in the foreseeable future, or in the case of deductible
differences, unless it is probable that they will reverse in the future.
The amount of deferred tax recognised is measured based on the expected manner of realisation or
settlement of the carrying amount of the assets and liabilities, using tax rates enacted or
substantively enacted at the end of the reporting period. Deferred tax assets and liabilities are not
discounted.
The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is
reduced to the extent that it is no longer probable that sufficient taxable profits will be available to
allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it
becomes probable that sufficient taxable profits will be available.
Current tax balances and deferred tax balances, and movements therein, are presented separately
from each other and are not offset. Current tax assets are offset against current tax liabilities, and
deferred tax assets against deferred tax liabilities, if the Group has the legally enforceable right to
set off current tax assets against current tax liabilities and the following additional conditions are
met:
– in the case of current tax assets and liabilities, the Group intends either to settle on a net
basis, or to realise the asset and settle the liability simultaneously; or
– in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the
same taxation authority on either:
– the same taxable entity; or
– different taxable entities, which, in each future period in which significant amounts
of deferred tax liabilities or assets are expected to be settled or recovered, intend to
realise the current tax assets and settle the current tax liabilities on a net basis or
realise and settle simultaneously.
(q) Provisions and contingent liabilities
(i) Provision for warranties
The Group provides warranty on its products for a period typically covering 12 to 24 months. The
Group estimates the costs that may be incurred under its warranty obligations and records a
liability in the amount of such costs when revenue is recognised. Warranty costs generally includes
parts, labour costs and service centre support. Factors that affect the Group’s warranty liability
include the number of installed units, historical and anticipated rates of warranty claims. The
Group periodically reassesses its warranty liabilities and adjusts the amounts as necessary.
22
F-23
3 Significant accounting policies (continued)
(q) Provisions and contingent liabilities (continued)
(ii) Provision for onerous contracts
A provision for onerous contracts is recognised when the expected benefits to be derived by the
Group from a contract are lower than the unavoidable cost of meeting its obligations under the
contract. The provision is measured at the present value of the lower of the expected cost of
terminating the contract and the expected net cost of continuing with the contract. Before a
provision is established, the Group recognises any impairment loss on the assets associated with
that contract.
(iii) Other provisions and contingent liabilities
Provisions are recognised for other liabilities of uncertain timing or amount when the Group has a
legal or constructive obligation arising as a result of a past event, it is probable that an outflow of
economic benefits will be required to settle the obligation and a reliable estimate can be made.
Where the time value of money is material, provisions are stated at the present value of the
expenditure expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the amount
cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the
probability of outflow of economic benefits is remote. Possible obligations, whose existence will
only be confirmed by the occurrence or non-occurrence of one or more future events are also
disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
(r) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Provided it is
probable that the economic benefits will flow to the Group and the revenue and costs, if applicable,
can be measured reliably, revenue is recognised in profit or loss as follows:
(i) Sale of goods and provision of services
Revenue from sale of goods is recognised when the significant risks and rewards of ownership of
goods have been transferred to the buyer. Revenue from provision of services is recognised at the
time when the services are provided. No revenue is recognised if there are significant uncertainties
regarding the recovery of the consideration due, associated costs or the possible return of goods.
Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.
(ii) Contract revenue
When the outcome of a construction contract can be estimated reliably, revenue from a fixed price
contract is recognised using the percentage of completion method, measured by reference to the
percentage of contract costs incurred to date to estimated total contract costs for the contract.
When the outcome of a construction contract cannot be estimated reliably, revenue is recognised
only to the extent of contract costs incurred that it is probable will be recoverable.
23
F-24
3 Significant accounting policies (continued)
(r) Revenue recognition (continued)
(iii) Government grants
Government grants are recognised in the consolidated statement of financial position initially
when there is reasonable assurance that they will be received and that the Group will comply with
the conditions attaching to them. Grants that compensate the Group for expenses incurred are
recognised as other income in profit or loss on a systematic basis in the same periods in which the
expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised as
deferred income and consequently are effectively recognised in profit or loss on a systematic basis
over the useful life of the asset.
(iv) Rental income from operating leases
Rental income receivable under operating leases is recognised in profit or loss in equal instalments
over the periods covered by the lease term, except where an alternative basis is more representative
of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are
recognised in profit or loss as an integral part of the aggregate net lease payments receivable.
Contingent rentals are recognised as income in the accounting period in which they are earned.
(s) Translation of foreign currencies
(i) Foreign currency transactions
Foreign currency transactions during the year are translated to the respective functional currencies
of group entities at the foreign exchange rates ruling at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies are translated to the functional currency at the foreign
exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised
in profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign
currency are translated using the foreign exchange rates ruling at the transactions dates.
Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value
are translated using the foreign exchange rates ruling at the dates the fair value was measured.
(ii) Foreign operations
The results of foreign operations, except for foreign operations in hyperinflationary economies,
are translated into RMB at the exchange rates approximating the foreign exchange rates ruling at
the dates of the transactions. Statement of financial position items are translated into RMB at the
closing foreign exchange rates at the end of the reporting period. The resulting exchange
differences are recognised in other comprehensive income and accumulated separately in equity in
the exchange reserve. If the operation is a non-wholly-owned subsidiary, then the relevant
proportionate share of the exchange difference is allocated to the non-controlling interests.
The results of foreign operations in hyperinflationary economies are translated to RMB at the
exchange rates ruling at the end of the reporting period. Prior to translating the financial
statements of foreign operations in hyperinflationary economies, their financial statements for the
current year are restated to account for changes in the general purchasing power of the local
currencies. The restatement is based on relevant price indices at the end of the reporting period.
24
F-25
3 Significant accounting policies (continued)
(s) Translation of foreign currencies (continued)
(ii) Foreign operations (continued)
When a foreign operation is disposed of in its entirety or partially such that control, significant
influence or joint control is lost, the cumulative amount in the exchange reserve related to that
foreign operation is reclassified to profit or loss as part of the gain or loss on disposal.
When the Group disposes of only part of its interest in a subsidiary that includes a foreign
operation while retaining control, the relevant proportion of the cumulative amount is reattributed
to non-controlling interests. When the Group disposes of only part of its investment in an associate
or a joint venture that includes a foreign operation while retaining significant influence or joint
control, the relevant proportion of the cumulative amount is reclassified to profit or loss.
(t) Finance income and expenses
Finance income comprises dividend and interest income on funds invested (including
available-for-sale financial assets), gains on the disposal of available-for-sale and held-for-trading
financial assets, and changes in the fair value of held-for-trading financial assets. Interest income
is recognised as it accrues using the effective interest method. Dividend income from listed and
unlisted investments is recognised when the equity holder’s right to receive payment is established;
dividend income from listed investments is recognised when the share price of the investment goes
ex-dividend.
Finance expenses comprise interest expense on borrowings, unwinding of the discount on
provisions and impairment losses recognised on available-for-sale financial assets. Borrowing
costs that are directly attributable to the acquisition, construction or production of an asset which
necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised
as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are
incurred.
The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when
expenditure for the asset is being incurred, borrowing costs are being incurred and activities that
are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of
borrowing costs is suspended or ceases when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are interrupted or completed.
Foreign exchange gains and losses are included under finance income or expenses on a net basis.
(u) Non-current assets held for sale
A non-current asset (or disposal group) is classified as held for sale if it is highly probable that its
carrying amount will be recovered through a sale transaction rather than through continuing use
and the asset (or disposal group) is available for sale in its present condition. A disposal group is a
group of assets to be disposed of together as a group in a single transaction, and liabilities directly
associated with those assets that will be transferred in the transaction.
25
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3 Significant accounting policies (continued)
(u) Non-current assets held for sale (continued)
Immediately before classification as held for sale, the measurement of the non-current assets (andall individual assets and liabilities in a disposal group) is brought up-to-date in accordance with theaccounting policies before the classification. Then, on initial classification as held for sale anduntil disposal, the non-current assets (except for certain assets as explained below), or disposalgroups, are recognised at the lower of their carrying amount and fair value less costs to sell. Theprincipal exceptions to this measurement policy so far as the consolidated financial statements ofthe Group are concerned are deferred tax assets, assets arising from employee benefits andfinancial assets (other than investments in associates and joint ventures). These assets, even if heldfor sale, would continue to be measured in accordance with the policies set out elsewhere in note 3.
Impairment losses on initial classification as held for sale, and on subsequent remeasurementwhile held for sale, are recognised in profit or loss. As long as a non-current asset is classified asheld for sale, or is included in a disposal group that is classified as held for sale, the non-currentasset is not depreciated or amortised.
(v) Related parties
(a) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or the Group’s equityholders.
(b) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same group (which means that eachparent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or jointventure of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of thethird entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either theGroup or an entity related to the Group.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member ofthe key management personnel of the entity (or of a parent of the entity).
Close members of the family of a person are those family members who may be expected toinfluence, or be influenced by, that person in their dealings with the entity.
26
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3 Significant accounting policies (continued)
(w) Segment reporting
Operating segments, and the amounts of each segment item reported in the financial statements,are identified from the financial information provided regularly to the Group’s most seniorexecutive management for the purposes of allocating resources to, and assessing the performanceof, the Group’s various lines of business and geographical locations.
Individually material operating segments are not aggregated for financial reporting purposesunless the segments have similar economic characteristics and are similar in respect of the natureof products and services, the nature of production processes, the type or class of customers, themethods used to distribute the products or provide the services, and the nature of the regulatoryenvironment. Operating segments which are not individually material may be aggregated if theyshare a majority of these criteria.
4 Changes in accounting policies
The IASB has issued a number of new IFRSs and amendments to IFRSs that are first effective forthe current accounting period of the Group. Of these, the following developments are relevant tothe consolidated financial statements:
• Amendments to IAS 1, Presentation of financial statements – Presentation of items of othercomprehensive income
• IFRS 10, Consolidated financial statements
• IFRS 11, Joint arrangements
• IFRS 12, Disclosure of interests in other entities
• IFRS 13, Fair value measurement
• Revised IAS 19, Employee benefits
• Annual Improvements to IFRSs 2009-2011 Cycle
• Amendments to IFRS 7 – Disclosures – Offsetting financial assets and financial liabilities
The Group has not applied any new standard or interpretation that is not yet effective for thecurrent accounting period. Impacts of the adoption of new or amended IFRSs are discussed below:
Amendments to IAS 1, Presentation of financial statements – Presentation of items of othercomprehensive income
The amendments require entities to present separately the items of other comprehensive incomethat would be reclassified to profit or loss in the future if certain conditions are met from those thatwould never be reclassified to profit or loss. The presentation of other comprehensive income inthe consolidated statement of profit or loss and other comprehensive income in these consolidatedfinancial statements has been modified accordingly.
In addition, the Group has chosen to use the new titles “statement of profit or loss” and “statementof profit or loss and other comprehensive income” as introduced by the amendments in theseconsolidated financial statements.
27
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4 Changes in accounting policies (continued)
IFRS 10, Consolidated financial statements
IFRS 10 replaces the requirements in IAS 27, Consolidated and separate financial statements
relating to the preparation of consolidated financial statements and SIC 12 Consolidation – Special
purpose entities. It introduces a single control model to determine whether an investee should be
consolidated, by focusing on whether the entity has power over the investee, exposure or rights to
variable returns from its involvement with the investee and the ability to use its power to affect the
amount of those returns.
As a result of the adoption of IFRS 10, the Group has changed its accounting policy with respect to
determining whether it has control over an investee. The adoption does not change any of the
control conclusions reached by the Group in respect of its involvement with other entities as at 1
January 2013.
IFRS 11, Joint arrangements
IFRS 11, which replaces IAS 31, Interests in joint ventures, divides joint arrangements into joint
operations and joint ventures. Entities are required to determine the type of an arrangement by
considering the structure, legal form, contractual terms and other facts and circumstances relevant
to their rights and obligations under the arrangement. Joint arrangements which are classified as
joint operations under IFRS 11 are recognised on a line-by-line basis to the extent of the joint
operator’s interest in the joint operation. All other joint arrangements are classified as joint
ventures under IFRS 11 and are required to be accounted for using the equity method in the
Group’s consolidated financial statements. Proportionate consolidation is no longer allowed as an
accounting policy choice.
As a result of the adoption of IFRS 11, the Group has changed its accounting policy with respect to
its interests in joint arrangements and re-evaluated its involvement in its joint arrangements. The
Group has reclassified the investments from jointly controlled entity to joint venture. The
investments continue to be accounted for using the equity method and therefore this
reclassification does not have any material impact on the financial position and the financial
performance of the Group.
IFRS 12, Disclosure of interests in other entities
IFRS 12 brings together into a single standard all the disclosure requirements relevant to an
entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured
entities. The disclosures required by IFRS 12 are generally more extensive than those previously
required by the respective standards. To the extent that the requirements are applicable to the
Group, the Group has provided those disclosures in notes 16 and 17.
IFRS 13, Fair value measurement
IFRS 13 replaces existing guidance in individual IFRSs with a single source of fair value
measurement guidance. IFRS 13 also contains extensive disclosure requirements about fair value
measurements for both financial instruments and non-financial instruments. To the extent that the
requirements are applicable to the Group, the Group has provided those disclosures in note 12 and
note 33. The adoption of IFRS 13 does not have any material impact on the fair value
measurements of the Group’s assets and liabilities.
28
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4 Changes in accounting policies (continued)
Revised IAS 19, Employee benefits
Revised IAS 19 introduces a number of amendments to the accounting for defined benefit plans.
Among them, revised IAS 19 requires all actuarial gains and losses to be recognised immediately
in other comprehensive income.
As a result of the adoption of revised IAS 19, the Group has changed its accounting policy with
respect to defined benefit plans, for which actuarial gains and losses were previously recognised in
profit or loss. This change in accounting policy has been applied retrospectively by restating the
balances at 1 January 2012 and 31 December 2012, with consequential adjustments to
comparatives for the year ended 31 December 2012 as follows:
As previouslyreported
Effect ofadoption of
revised IAS 19 As restated
RMB’000 RMB’000 RMB’000Consolidated statement of profit or loss
for the year ended 31 December 2012:Defined benefit plan expense . . . . . . . . . . . . . . . . (2,239,991) 290,417 (1,949,574)
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,711,328) (46,626) (2,757,954)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . 15,379,926 243,791 15,623,717
Consolidated statement of profit or loss andother comprehensive income for yearended 31 December 2012:Remeasurement of defined benefit obligations . . . . – (243,791) (243,791)
Other comprehensive income for the year . . . . . . . 94,866 (243,791) (148,925)
Consolidated statement of financial positionas at 31 December 2012:Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,513,389 (1,639,837) 10,873,552
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 17,852,013 1,639,837 19,491,850
Consolidated statement of financial positionas at 1 January 2012:Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,639,240 (1,396,046) 9,243,194
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 16,366,681 1,396,046 17,762,727
Had the policy not been changed, the Group’s net profit and other comprehensive income for the
year ended 31 December 2013 would have decreased by RMB618,227,000 and increased by
RMB618,227,000 respectively.
Annual Improvements to IFRSs 2009-2011 Cycle
This cycle of annual improvements contains amendments to five standards with consequential
amendments to other standards and interpretations. Among them, IAS 1 has been amended to
clarify that an opening statement of financial position is required only when a retrospective
application of an accounting policy, a retrospective restatement or a reclassification has a material
effect on the information presented in the opening statement of financial position. The
amendments also remove the requirement to present related notes to the opening statement of
financial position when such statement is presented.
Since the Group considers that the restatement resulting from the adoption of revised IAS 19 has a
material impact on the opening financial position, an additional consolidated statement of
financial position as at 1 January 2012 has been presented in these consolidated financial
statements.
29
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4 Changes in accounting policies (continued)
Amendments to IFRS 7 – Disclosures – Offsetting financial assets and financial liabilities
The amendments introduce new disclosures in respect of offsetting financial assets and financialliabilities. Those new disclosures are required for all recognised financial instruments that are setoff in accordance with IAS 32, Financial instruments: Presentation and those that are subject to anenforceable master netting arrangement or similar agreement that covers similar financialinstruments and transactions, irrespective of whether the financial instruments are set off inaccordance with IAS 32.
The adoption of the amendments does not have an impact on these consolidated financialstatements because the Group has not offset financial instruments, nor has it entered into masternetting arrangement or similar agreement which is subject to the disclosures of IFRS 7 during theperiods presented.
5 Revenue
2013 2012
RMB’000 RMB’000Sale of goods and provision of services . . . . . . . . . . . . . . . . . . . . . . . 238,947,809 220,084,300
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,201 114,044
239,025,010 220,198,344
6 Other income and other operating expenses
(a) Other income
Note 2013 2012
RMB’000 RMB’000Gain on disposal of property, plant and equipment and
intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,028,839 770,518
Government grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) 464,609 749,730
Penalty income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,659 228,720
Commissions on individual income tax payments withheld 122,625 168,125
Gain on deemed disposal of a joint venture . . . . . . . . . . . – 509,926
Gain from liquidation of a subsidiary . . . . . . . . . . . . . . . – 34,370
Gain on disposal of associates . . . . . . . . . . . . . . . . . . . . – 57,889
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293,810 394,277
2,064,542 2,913,555
(i) During the year ended 31 December 2013, the Group received unconditional governmentgrants of RMB306,625,000 (2012: RMB587,375,000) in respect of its contributions to thedevelopment of research and innovation in the PRC. These grants were directly recognisedas other income.
During the year ended 31 December 2013, the Group received government grants ofRMB686,125,000 (2012: RMB523,296,000) which were conditional upon completion ofcertain research and development projects. These grants were initially recognised in theconsolidated statement of financial position as deferred government grants and amortisedthrough the consolidated statement of profit or loss on a systematic basis in the same periodsin which the related research and development expenses are incurred. During the year ended31 December 2013, conditional government grants of RMB157,984,000 (2012:RMB162,355,000) were recognised in profit or loss.
30
F-31
6 Other income and other operating expenses (continued)
(b) Other operating expenses
2013 2012
RMB’000 RMB’000Expense on factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,483 761,669
Penalty expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,196 109,658
Net loss on disposal of property, plant and equipment andintangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,610 51,719
Donations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,617 42,679
Impairment loss of intangible assets and goodwill . . . . . . . . . . . . . . . . – 278,052
Loss on deemed disposal of a joint venture . . . . . . . . . . . . . . . . . . . . . – 24,152
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482,551 259,488
1,341,457 1,527,417
7 Personnel expenses
Note 2013 2012
RMB’000 RMB’000Restated(Note 4)
Expenses recognised in respect of defined benefit plan . . . 30(b)(iii) 1,337,794 1,538,375
Contributions to defined contribution retirement plans . . . 6,497,349 5,864,633
Total costs on post-employment plans . . . . . . . . . . . . . . . 7,835,143 7,403,008
Salaries, wages and other benefits . . . . . . . . . . . . . . . . . 44,615,006 39,979,244
52,450,149 47,382,252
8 Net finance expenses
Note 2013 2012
RMB’000 RMB’000Restated(Note 4)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 838,782 844,042
Net gain on disposal of available-for-sale wealthmanagement products . . . . . . . . . . . . . . . . . . . . . . . . 10(b) 1,056,473 784,955
Net gain on disposal of other available-for-sale securitiesand held-for-trading equity securities . . . . . . . . . . . . . 41,785 840
Dividend income from available-for-sale equity securities . 8,970 1,200
Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,946,010 1,631,037- - - - - - - - - - - - - - - - - - - - - - - -
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,357,735) (1,758,068)
Net foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . (3,686,178) (1,085,283)
Impairment loss of available-for-sale securities . . . . . . . . 10(b) – (10,851)
Bank charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (418,097) (405,777)
Interest cost on defined benefit obligations . . . . . . . . . . . 30(b)(iii) (469,007) (411,199)
(5,931,017) (3,671,178)
Less: interest expense capitalised . . . . . . . . . . . . . . . . . . 42,255 –
Finance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,888,762) (3,671,178)- - - - - - - - - - - - - - - - - - - - - - - -
Net finance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (3,942,752) (2,040,141)
The borrowing costs have been capitalised at a rate of 5.90% per annum in 2013.
31
F-32
9 Income tax in the consolidated statement of profit or loss
(a) Taxation in the consolidated statement of profit or loss represents:
2013 2012
RMB’000 RMB’000Restated(Note 4)
Current taxProvision for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,383,472 3,261,853
(Over)/under-provision in respect of prior years . . . . . . . . . . . . . . . . . (77,737) 107,874
6,305,735 3,369,727
Deferred taxOrigination and reversal of temporary differences . . . . . . . . . . . . . . . . (2,146,983) (611,773)
4,158,752 2,757,954
(b) Reconciliation between tax expenses and accounting profit at applicable tax rates:
Note 2013 2012
RMB’000 RMB’000Restated(Note 4)
Profit before taxation . . . . . . . . . . . . . . . . . . . . . . . . . . 25,161,769 18,381,671
Notional tax on profit before taxation, calculated atthe rates applicable to profits in the tax jurisdictionsconcerned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) 4,470,154 3,112,665
Effect on opening deferred tax balances resultingfrom change in tax rates during the year . . . . . . . . . . . 104,942 (34,756)
Tax effect of bonus deduction of research and developmentexpenses, non-taxable income, netted off bynon-deductible expenses . . . . . . . . . . . . . . . . . . . . . . (ii) (1,055,659) (1,260,039)
Deferred tax liabilities recognised for the undistributedprofits of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 229,179 105,629
Tax effect of unused tax losses and deductible temporarydifferences not recognised . . . . . . . . . . . . . . . . . . . . . 487,873 726,581
(Over)/under-provision in respect of prior years . . . . . . . . (77,737) 107,874
Actual tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,158,752 2,757,954
(i) In accordance with the Corporate Income Tax Law of the PRC effective from 1 January
2008, enterprises established in the PRC are subject to PRC corporate income tax at the
statutory rate of 25% unless otherwise specified.
Pursuant to the rules and regulations applicable to advanced technology enterprises
established in the PRC, certain domestic subsidiaries are subject to PRC corporate income
tax at a preferential tax rate of 15%. Some qualified domestic subsidiaries enjoy respective
preferential policies in accordance with the Corporate Income Tax Law of the PRC.
Overseas subsidiaries are charged at the appropriate current rates of taxation ruling in the
relevant countries in which they operate.
(ii) According to relevant tax rules in the PRC, certain research and development expenses,
qualify for bonus deduction for income tax purpose, i.e. an additional 50% of such expenses
may be deemed as tax deductible expenses.
32
F-33
10 Other comprehensive income
(a) Tax effects relating to each component of other comprehensive income
2013 2012
Before-taxamount
Tax benefit/(expense)
Net-of-taxamount
Before-taxamount Tax benefit
Net-of-taxamount
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Restated Restated Restated(Note 4) (Note 4) (Note 4)
Remeasurement of defined benefitobligations
– The Group . . . . . . . . . . . . . . . (719,613) 102,088 (617,525) (290,417) 46,626 (243,791)
– Share of associates and jointventures . . . . . . . . . . . . . . . (702) – (702) – – –
(720,315) 102,088 (618,227) (290,417) 46,626 (243,791)- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Net change in the fair value ofavailable-for-sale securities . . . . . . 186,702 (21,745) 164,957 57,749 – 57,749
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Exchange differences on translation of
financial statements of foreignoperations
– The Group . . . . . . . . . . . . . . . 228,666 – 228,666 36,897 – 36,897
– Share of associates and jointventures . . . . . . . . . . . . . . . 907 – 907 220 – 220
229,573 – 229,573 37,117 – 37,117- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Other comprehensive income . . . . . . (304,040) 80,343 (223,697) (195,551) 46,626 (148,925)
(b) Components of other comprehensive income, including reclassification adjustments
2013 2012
RMB’000 RMB’000Available-for-sale securities:
Changes in fair value recognised during the year . . . . . . . . . . . . . . . 1,243,175 831,853
Reclassification adjustment for amounts transferred to profit or loss:
– Gain on disposal (note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,056,473) (784,955)
– Impairment losses (note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . – 10,851
Net deferred tax charged to other comprehensive income . . . . . . . . . (21,745) –
Net movement in the fair value reserve during the year recognisedin other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . 164,957 57,749
Exchange differences:
Recognised during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,573 84,084
Reclassification adjustment for amounts transferred to profit or loss:
– Gain on deemed disposal of a joint venture andfrom liquidation of a subsidiary . . . . . . . . . . . . . . . . . . . . . . – (46,967)
Net movement in the exchange reserve during the year recognisedin other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . 229,573 37,117
33
F-34
11 Segment reporting
The Group divides its business into three operating segments in accordance with the types of
products and services provided:
• Carrier Network
Develops and manufactures a wide range of wireless network, fixed network, carrier
software and core network, as well as services solutions to telecommunications operators.
• Enterprise
Develops integratable information and communication technology (“ICT”) products and
solutions including enterprise network infrastructure, cloud-based green data centers,
enterprise information security and unified communication & collaboration, and delivers
these solutions to vertical industries such as governments & public utilities, enterprises,
energy, power, transportation and finance.
• Consumers
Develops and manufactures mobile broadband devices, home devices, smartphones, as well
as the applications on these devices, and delivers them to consumers and businesses.
The reportable segments are determined based on the Group’s organisation structure, management
requirement and reporting system.
Each reportable segment is managed separately because each requires different technology and
marketing strategies. The financial information of the different segments is regularly reviewed by
the Group’s most senior executive management for the purpose of resource allocation and
performance assessment.
(i) Segment results, assets and liabilities
For the purposes of assessing segment performance and allocating resources between segments,
the Group’s senior executive management monitors the results of operations and assets attributable
to each reportable segment on the following bases:
Segment assets include all tangible, intangible assets and current assets with the exception of
interest in associates, interest in joint ventures, other investments, deferred tax assets and other
corporate assets.
Results of operations are operating profit before financing costs attributable to the individual
segments.
34
F-35
11 Segment reporting (continued)
(i) Segment results, assets and liabilities (continued)
2013
CarrierNetwork Enterprise Consumers
Unallocateditems Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Reportable segment revenue . 166,512,189 15,263,113 56,986,067 263,641 239,025,010
Reportable segment profit(operating profit beforefinancing costs) . . . . . . . . 27,769,060 (2,718,306) 3,031,529 1,046,155 29,128,438
Reportable segment assets . . 78,441,831 8,451,784 12,234,016 132,404,187 231,531,818
Total liabilities . . . . . . . . . . 145,265,702
Other segment informationDepreciation and amortisation 1,621,995 361,615 390,466 1,906,545 4,280,621
Impairment of intangibleassets and goodwill . . . . . . – – – – –
Capital expenditure (Note (a)) 1,153,693 213,212 708,760 5,748,067 7,823,732
2012
CarrierNetwork Enterprise Consumers
Unallocateditems Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Reportable segment revenue . 160,093,247 11,529,713 48,376,380 199,004 220,198,344
Reportable segment profit(operating profit beforefinancing costs) . . . . . . . . 20,385,880 (3,568,034) 2,410,770 1,429,830 20,658,446
Reportable segment assets . . 73,536,210 8,775,616 10,171,438 117,522,339 210,005,603
Total liabilities . . . . . . . . . . 134,981,995
Other segment informationDepreciation and amortisation 1,438,196 265,026 294,435 2,280,446 4,278,103
Impairment of intangibleassets and goodwill . . . . . . 278,052 – – – 278,052
Capital expenditure (Note (a)) 1,165,488 234,803 374,441 5,192,223 6,966,955
(a) Expenditure incurred on acquisition of property, plant and equipment, long-term leasehold
prepayments and intangible assets excluding assets acquired as part of business
combinations and goodwill.
35
F-36
11 Segment reporting (continued)
(ii) Reconciliation of reportable segment profit
2013 2012
RMB’000 RMB’000Restated
Reportable segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,128,438 20,658,446
Net finance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,942,752) (2,040,141)
Share of associates’ results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,073 (472)
Share of joint ventures’ results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,990) (236,162)
Consolidated profit before taxation . . . . . . . . . . . . . . . . . . . . . . . . . . 25,161,769 18,381,671
(iii) Geographic information
The following table sets out information about the geographical location of (i) the Group’s revenue
from external customers and (ii) the Group’s non-current assets excluding deferred tax assets
(“specified non-current assets”). The geographical location of customers is based on the location at
which the services were provided or the goods were delivered. The geographical location of the
specified non-current assets is based on the location of operations to which the assets are related.
Revenue fromexternal customers
Specifiednon-current assets
2013 2012 2013 2012
RMB’000 RMB’000 RMB’000 RMB’000China . . . . . . . . . . . . . . . . . . . . . . . . 84,017,294 73,579,446 24,546,602 21,637,277
Americas . . . . . . . . . . . . . . . . . . . . . 31,428,193 31,845,296 1,412,982 2,218,470
Asia Pacific . . . . . . . . . . . . . . . . . . . . 38,925,012 37,359,114 5,127,999 4,980,702
Europe, the Middle East and Africa . . . 84,654,511 77,414,488 2,023,483 1,895,920
Total . . . . . . . . . . . . . . . . . . . . . . . . 239,025,010 220,198,344 33,111,066 30,732,369
Major customer
Revenue from one customer of the Group of RMB37,096,576,000 (2012: RMB28,082,090,000)
represents approximately 16% (2012: 13%) of the Group’s total revenue.
36
F-37
12 Property, plant and equipment
Freehold land Buildings
Machinery,electronicequipmentand otherequipment
Motorvehicles
Constructionin progress
Investmentproperty
Decorationand leaseholdimprovements Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Cost:At 1 January 2012 . . . . . 49,559 7,357,650 14,411,944 483,774 5,304,142 567,451 4,271,379 32,445,899Exchange adjustment . . . . (756) (1,790) (14,376) (2,951) (16,529) – (7,748) (44,150)Additions . . . . . . . . . . – 2,770 2,598,245 91,039 2,729,876 – 800,308 6,222,238Transfer from construction
in progress . . . . . . . . – 1,968,774 1,131,414 – (4,252,762) – 1,152,574 –Acquisitions through
business combinations . . – – 94,986 744 – – 9,685 105,415Disposals . . . . . . . . . . – (219,604) (577,931) (33,355) – (133,358) (496,194) (1,460,442)Reclassified to held for sale – (415,147) (9,751) – – – (18,560) (443,458)
At 31 December 2012 . . . . 48,803 8,692,653 17,634,531 539,251 3,764,727 434,093 5,711,444 36,825,502- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -At 1 January 2013 . . . . . 48,803 8,692,653 17,634,531 539,251 3,764,727 434,093 5,711,444 36,825,502Exchange adjustment . . . . (1,310) (11,384) (340,598) (21,627) (70,538) – (64,512) (509,969)Additions . . . . . . . . . . 58,933 12,560 2,527,172 82,761 3,178,501 – 238,557 6,098,484Transfer from construction
in progress . . . . . . . . – 757,827 543,478 – (1,962,577) – 661,272 –Acquisitions through
business combinations(note 38(c)) . . . . . . . . – – 2,465 – – – 27 2,492
Disposals . . . . . . . . . . – (23,628) (865,768) (57,415) – – (45,112) (991,923)
At 31 December 2013 . . . . 106,426 9,428,028 19,501,280 542,970 4,910,113 434,093 6,501,676 41,424,586- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Accumulated depreciation:At 1 January 2012 . . . . . – 1,844,871 8,568,491 302,922 – 289,298 2,809,421 13,815,003Exchange adjustment . . . . – (436) (25,280) (1,326) – – (4,927) (31,969)Depreciation charge for
the year . . . . . . . . . . – 442,595 2,131,358 78,858 – 22,443 1,131,314 3,806,568Disposals . . . . . . . . . . – (40,753) (513,715) (27,949) – (26,922) (423,660) (1,032,999)Reclassified to held for sale – (79,597) (3,500) – – – (13,752) (96,849)
At 31 December 2012 . . . . – 2,166,680 10,157,354 352,505 – 284,819 3,498,396 16,459,754- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
At 1 January 2013 . . . . . – 2,166,680 10,157,354 352,505 – 284,819 3,498,396 16,459,754Exchange adjustment . . . . – (1,665) (175,624) (11,575) – – (42,337) (231,201)Depreciation charge for
the year . . . . . . . . . . – 408,188 2,402,472 68,400 – 21,893 855,998 3,756,951Disposals . . . . . . . . . . – (18,183) (666,690) (49,373) – – (35,701) (769,947)At 31 December 2013 . . . . – 2,555,020 11,717,512 359,957 – 306,712 4,276,356 19,215,557
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Carrying amounts:At 31 December 2013 . . . . 106,426 6,873,008 7,783,768 183,013 4,910,113 127,381 2,225,320 22,209,029
At 31 December 2012 . . . . 48,803 6,525,973 7,477,177 186,746 3,764,727 149,274 2,213,048 20,365,748
Investment property
The Group leased out certain buildings to third parties. Such buildings are classified as investmentproperty.
The carrying value of investment property as at 31 December 2013 is RMB127,381,000 (2012:RMB149,274,000). The fair value of investment property as at 31 December 2013 is estimated bymanagement to be RMB251,875,000 (2012: RMB273,496,000).
The fair value of investment property is determined by the Group internally by reference to marketconditions and discounted cash flow forecasts. The Group’s current lease agreements, which wereentered into on an arm’s-length basis, are taken into account when estimating future cash flow. Thefair value measurement is categorised into level 3 of the three-level fair value hierarchy as definedin IFRS 13, Fair value measurement (note 33(e)(i)).
37
F-38
13 Long-term leasehold prepayments
2013 2012
RMB’000 RMB’000At 1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,360,926 2,222,759
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461,936 197,644
Amortisation for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,750) (59,477)
At 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,761,112 2,360,926
14 Intangible assets
Software Patents Trademark Total
RMB’000 RMB’000 RMB’000 RMB’000Cost:At 1 January 2012 . . . . . . . . . . . . . . . 1,409,527 975,418 76,911 2,461,856
Additions . . . . . . . . . . . . . . . . . . . . . 308,700 234,833 3,540 547,073
Acquisitions through businesscombinations . . . . . . . . . . . . . . . . . – 472,833 1,500 474,333
Disposals . . . . . . . . . . . . . . . . . . . . . (31,400) (7,536) – (38,936)
At 31 December 2012 . . . . . . . . . . . . . 1,686,827 1,675,548 81,951 3,444,326- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
At 1 January 2013 . . . . . . . . . . . . . . . 1,686,827 1,675,548 81,951 3,444,326
Exchange adjustment . . . . . . . . . . . . . (25,882) (2,011) 783 (27,110)
Additions . . . . . . . . . . . . . . . . . . . . . 519,245 559,175 4,036 1,082,456
Acquisitions through businesscombinations (note 38(c)) . . . . . . . . 95,992 46,265 75 142,332
Disposals . . . . . . . . . . . . . . . . . . . . . (27,088) (99,591) (390) (127,069)
At 31 December 2013 . . . . . . . . . . . . . 2,249,094 2,179,386 86,455 4,514,935- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Accumulated amortisation andimpairment losses:
At 1 January 2012 . . . . . . . . . . . . . . . 806,939 468,082 23,491 1,298,512
Exchange adjustment . . . . . . . . . . . . . 491 – 89 580
Amortisation for the year . . . . . . . . . . 238,066 167,455 6,537 412,058
Disposals . . . . . . . . . . . . . . . . . . . . . (16,534) (1,139) – (17,673)
Impairment losses . . . . . . . . . . . . . . . 52,452 – 9,529 61,981
At 31 December 2012 . . . . . . . . . . . . . 1,081,414 634,398 39,646 1,755,458- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
At 1 January 2013 . . . . . . . . . . . . . . . 1,081,414 634,398 39,646 1,755,458
Exchange adjustment . . . . . . . . . . . . . (14,287) (710) 253 (14,744)
Amortisation for the year . . . . . . . . . . 263,439 191,870 6,611 461,920
Disposals . . . . . . . . . . . . . . . . . . . . . (18,729) (78,914) (361) (98,004)
At 31 December 2013 . . . . . . . . . . . . . 1,311,837 746,644 46,149 2,104,630- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Carrying amounts:At 31 December 2013 . . . . . . . . . . . . . 937,257 1,432,742 40,306 2,410,305
At 31 December 2012 . . . . . . . . . . . . . 605,413 1,041,150 42,305 1,688,868
The amortisation charge for the year is included in “cost of sales”, “research and development
expenses”, “selling expenses” and “administrative expenses” in the consolidated statement of
profit or loss. The impairment losses are included in “other operating expenses” in the
consolidated statement of profit or loss.
38
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15 Goodwill
Note 2013 2012
RMB’000 RMB’000Cost:At 1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,608,582 217,759
Exchange adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . (87,124) (28,030)
Acquisitions through business combinations . . . . . . . . . . 38(c) 44,378 3,418,853
At 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,565,836 3,608,582- - - - - - - - - - - - - - - - - - - - - - - -
Accumulated impairment losses:At 1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,792 –
Exchange adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . 3,327 3,721
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 216,071
At 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,119 219,792- - - - - - - - - - - - - - - - - - - - - - - -
Carrying amount:At 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,342,717 3,388,790
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the Group’s cash-generating units (“CGU”) or group of CGUs, which is
either an operating segment or at a level not larger than an operating segment, as follows:
2013 2012
RMB’000 RMB’000Sectors under Enterprise business group . . . . . . . . . . . . . . . . . . . . . . . 3,139,188 3,229,208
International Turnkey Systems Technologies W.L.L (“ITS Bahrain”) . . . – –
Beijing Huawei Longshine Information Technology Company Limited(“Beijing Huawei Longshine”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,368 154,368
Multiple units without significant goodwill . . . . . . . . . . . . . . . . . . . . 49,161 5,214
3,342,717 3,388,790
39
F-40
15 Goodwill (continued)
Impairment tests for cash-generating units containing goodwill (continued)
Goodwill is allocated to the Group’s CGUs expected to benefit from the synergies of theacquisitions. For annual impairment assessment purposes, the recoverable amount of the CGUs arebased on their value-in-use calculations. The value-in-use calculations apply a discounted cashflow model using cash flow projections based on financial budgets approved by managementcovering five-year, eight-year and five-year period for sectors under Enterprise business group,ITS Bahrain and Beijing Huawei Longshine, respectively, based on their industry expertise. Thekey assumptions for the calculation of value-in-use include the discount rates and growth ratesapplied. Discount rates used are pre-tax and reflect specific risks relating to respective CGU orgroup of CGUs. Cash flows beyond the aforementioned approved financial budget’s periods areextrapolated using an estimated growth rate applied. The growth rate does not exceed thelong-term average growth rate for the business in which the CGU or group of CGUs operates.Discount rates and growth rates applied for the computation of value-in-use are as follows:
As at 31 December
2013 2012
% %Sectors under Enterprise business group
– Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.0 14.5
– Terminal value growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 10.0
ITS Bahrain
– Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n/a 36.4
– Terminal value growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n/a 4.0
Beijing Huawei Longshine
– Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.9 19.1
– Terminal value growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.0
During the year ended 31 December 2012, impairment loss of RMB216,071,000 related togoodwill allocated to ITS Bahrain was recognised and the carrying amount of the goodwillallocated was reduced to nil.
16 Interest in associates
Details of the Group’s interest in the material associates are as follows:
Name of associate
Form ofbusinessstructure
Place ofincorporationand business
Proportion ofownership interest Principal activity
2013 2012
TD Tech Holding Limited(“TD Tech”) . . . . . . . . . . . .
Incorporated Hong Kong,PRC
49% 49% Research and development,production and sale ofTD-SCDMAtelecommmunicationproducts
Tianwen Digital MediaTechnology (Beijing)Co., Ltd. (“Tianwen DigitalMedia”) . . . . . . . . . . . . . . .
Incorporated Beijing, PRC 49% 49% Development, publicationand operation of digitalmedia related services
All of the associates are accounted for using equity method in the consolidated financialstatements.
40
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16 Interest in associates (continued)
Summarised financial information of the material associates, reconciled to the carrying amounts inthe consolidated financial statements, are disclosed below:
TD Tech Tianwen Digital Media
2013 2012 2013 2012
RMB’000 RMB’000 RMB’000 RMB’000Gross amounts of the associates’Current assets . . . . . . . . . . . . . . . . . . . . . . . 368,539 1,194,033 302,292 257,298Non-current assets . . . . . . . . . . . . . . . . . . . . 55,836 75,613 8,476 8,282Current liabilities . . . . . . . . . . . . . . . . . . . . . (429,069) (1,188,448) (60,498) (14,684)Non-current liabilities . . . . . . . . . . . . . . . . . (86,952) (3,114) (1,660) (3,500)Equity (deficit) . . . . . . . . . . . . . . . . . . . . . . (91,646) 78,084 248,610 247,396Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,972,117 2,800,635 138,818 9,992(Loss)/profit . . . . . . . . . . . . . . . . . . . . . . . . (169,730) 78,084 1,214 (57,798)Total comprehensive income . . . . . . . . . . . . . (169,730) 78,084 1,214 (57,798)
Reconciled to the Group’s interestin the associates
Gross amounts of net assets of the associate . . (91,646) 78,084 248,610 247,396Group’s effective interest . . . . . . . . . . . . . . . 49% 49% 49% 49%Group’s share of net assets of the associate . . . (44,907) 38,261 121,819 121,224Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . – – 4,996 4,996Net loss not shared by the Group . . . . . . . . . . 44,907 – – –Carrying amount in the consolidated financial
statements . . . . . . . . . . . . . . . . . . . . . . . . – 38,261 126,815 126,220
Aggregate information of associates that are not individually material:
2013 2012
RMB’000 RMB’000Aggregate carrying amount of individually immaterial associates
in the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . 142,921 78,598Aggregate amounts of the Group’s share of those associates’
Profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,738 (10,412)Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,738 (10,412)
17 Interest in joint ventures
Details of the Group’s interest in the material joint ventures are as follows:
Name of associate
Form ofbusinessstructure
Place ofincorporationand business
Proportion ofownership interest Principal activity
2013 2012
Huawai Marine Systems Co., Ltd.(“Huawei Marine”) . . . . . . . . .
Incorporated Hong Kong,PRC
51% 51% Construction and operationof submarine fibres
Chengdu Huawei InvestmentCo., Ltd. (“CD Investment”). . . .
Incorporated Chengdu,PRC
49% 49% Investment, lease ofproperty and machinery,developments of hightechnology products andprovision of relatedservices, sale oftelecommunication andelectronic products
All of the joint ventures are accounted for using equity method in the consolidated financialstatements.
41
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17 Interest in joint ventures (continued)
Summarised financial information of the material joint ventures, reconciled to the carryingamounts in the consolidated financial statements, are disclosed below:
Huawei Marine CD Investment
2013 2012 2013 2012
RMB’000 RMB’000 RMB’000 RMB’000Gross amounts of the joint ventures’Current assets . . . . . . . . . . . . . . . . . . 439,089 447,359 172,901 48,982Non-current assets . . . . . . . . . . . . . . . 19,843 27,681 1,422,159 1,612,295Current liabilities . . . . . . . . . . . . . . . . (322,109) (333,151) (239,233) (312,868)Non-current liabilities . . . . . . . . . . . . (12,645) (16,701) (1,136,631) (1,054,420)Equity . . . . . . . . . . . . . . . . . . . . . . . 124,178 125,188 219,196 293,989
Included in the above assets andliabilities:
Cash and cash equivalents . . . . . . . . . . 98,458 73,665 4,205 2,922Non-current financial liabilities
(excluding trade and other payablesand provisions) . . . . . . . . . . . . . . . . – – (1,136,631) (1,054,420)
Revenue . . . . . . . . . . . . . . . . . . . . . . 497,765 582,664 241,251 59,812Profit/(loss) . . . . . . . . . . . . . . . . . . . . 19,915 (34,317) (74,793) (67,353)Other comprehensive income . . . . . . . . 402 431 – –Total comprehensive income . . . . . . . . 20,317 (33,886) (74,793) (67,353)
Included in the above profit/(loss):Depreciation and amortisation . . . . . . . 11,067 10,105 190,137 46,129Interest income . . . . . . . . . . . . . . . . . 206 376 65 65Interest expense . . . . . . . . . . . . . . . . . – – 71,505 21,793Income tax expense . . . . . . . . . . . . . . 990 1,431 668 –
Reconciled to the Group’s interest inthe joint ventures
Gross amounts of net assets ofthe joint venture . . . . . . . . . . . . . . . 124,178 125,188 219,196 293,989
Group’s effective interest . . . . . . . . . . 51% 51% 49% 49%Carrying amount in the consolidated
financial statements . . . . . . . . . . . . 63,331 63,846 107,406 144,055
Aggregate information of joint ventures that are not individually material:
2013 2012
RMB’000 RMB’000Aggregate carrying amount of individually immaterial joint ventures
in the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . 40,132 41,630
Aggregate amounts of the Group’s share of those joint ventures’Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,498) (185,657)Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,498) (185,657)
42
F-43
18 Other investments
Note 2013 2012
RMB’000 RMB’000Available-for-sale financial assets:
– Unlisted equity securities stated at cost . . . . . . . . . . . 477,327 502,063– Listed equity securities stated at fair value . . . . . . . . 118,047 76,352– Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,684 6,778– Wealth management products . . . . . . . . . . . . . . . . . . (i) 8,544,966 4,456,222
Held-for-trading equity securities . . . . . . . . . . . . . . . . . . – 12,585
9,145,024 5,054,000Less: Impairment losses . . . . . . . . . . . . . . . . . . . . . . . . (ii) (16,184) (36,573)
9,128,840 5,017,427
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 583,874 548,620Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,544,966 4,468,807
9,128,840 5,017,427
(i) The Group purchased certain wealth management products from commercial banks withmaturity less than one year. The principal and earnings of these wealth managementproducts were not guaranteed. These wealth management products were classified asavailable-for-sale in accordance with the policy set out in note 3(f).
(ii) As at 31 December 2013 and 2012, certain of the Group’s available-for-sale equity and debtsecurities were individually determined to be impaired on the basis of a material decline andadverse changes in the market in which the investees operated which indicated that the costof the Group’s investment in them may not be recovered. Impairment losses on theseinvestments are recognised in profit or loss in accordance with the policy set out in note 3(l).
19 Deferred tax assets/(liabilities)
(a) The components of deferred tax assets/(liabilities) recognised in the consolidated statement offinancial position and the movements during the year are as follows:
Deferred tax arising from:
Accruedbonus and
otherexpenses
Provisionfor
warranties
Depreciationof property,
plant andequipment
Provisionfor
impairmentlosses
Definedbenefit
obligations Tax losses
Undistributedprofits of
subsidiariesUnrealised
profit
Fair valueadjustmentson business
combinations Others Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000At 1 January 2012. . . . . . 3,231,918 260,895 259,196 538,067 1,068,860 169,901 (369,304) 3,136,701 (50,237) 196,922 8,442,919Exchange adjustment . . . . (114,689) 34,651 (114,170) (4,592) (26,048) (53,151) 7,081 21,276 6,682 237,665 (5,295)Credited/(charged) to profit
or loss (restated)(note 9(a)) . . . . . . . . 173,199 50,670 175,697 554,467 18,926 119,109 (105,629) (669,704) 26,098 268,940 611,773
Credited to othercomprehensive income(restated) (note 10(a)) . . . – – – – 46,626 – – – – – 46,626
Acquired in businesscombinations (note 38(c)) . – – – – – – – – (74,769) – (74,769)
At 31 December 2012 . . . . 3,290,428 346,216 320,723 1,087,942 1,108,364 235,859 (467,852) 2,488,273 (92,226) 703,527 9,021,254
At 1 January 2013. . . . . . 3,290,428 346,216 320,723 1,087,942 1,108,364 235,859 (467,852) 2,488,273 (92,226) 703,527 9,021,254Exchange adjustment . . . . (12,903) 41,276 (18,787) (107,920) (31,976) (8,893) 6,576 (219) 1,159 15,497) (147,184)Credited/(charged) to
profit or loss (note 9(a)) . . 984,308 79,338 (32,461) (8,887) (167,542) (120,459) 301,825 643,309 16,574 450,978 2,146,983Credited/(charged) to other
comprehensive income(note 10(a)) . . . . . . . – – – – 102,088 – – – – (21,745) 80,343
Acquired in businesscombinations (note 38(c)) . – – – – – – – – (573) – (573)
At 31 December 2013 . . . . 4,261,833 466,830 269,475 971,135 1,010,934 106,507 (159,451) 3,131,363 (75,066) 1,117,263 11,100,823
43
F-44
19 Deferred tax assets/(liabilities) (continued)
(a) The components of deferred tax assets/(liabilities) recognised in the consolidated statement offinancial position and the movements during the year are as follows: (continued)
Reconciliation to the consolidated statement of financial position
2013 2012
RMB’000 RMB’000Net deferred tax assets recognised in the consolidated statement
of financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,576,567 9,805,326Net deferred tax liabilities recognised in the consolidated statement
of financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (475,744) (784,072)
11,100,823 9,021,254
(b) Deferred tax assets not recognised
As at 31 December 2013 and 2012, deferred tax assets were not recognised in relation to certainunused tax losses and other deductible temporary differences. The unrecognised unused tax lossesand deductible temporary differences are analysed as follows:
2013 2012
RMB’000 RMB’000Other deductible temporary differences . . . . . . . . . . . . . . . . . . . . . . . 1,007,558 573,834Tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,463,188 1,396,039
2,470,746 1,969,873
Deferred tax assets have not been recognised in respect of certain provisions for impairment lossesand other provisions as management believes that these provisions are unlikely to be allowed fortax deduction by the relevant tax authorities.
Deferred tax assets have not been recognised in respect of certain unused tax losses as it wasdetermined by management that it is not probable that future taxable profits against which the taxlosses can be utilised will be available before they expire.
20 Inventories
(a) Inventories in the consolidated statement of financial position comprise:
2013 2012
RMB’000 RMB’000Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,990,340 6,312,528Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,149,514 2,462,131Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,076,866 5,734,153Goods delivered but not completely installed . . . . . . . . . . . . . . . . . . . 8,712,211 7,727,713
24,928,931 22,236,525
(b) The analysis of the amount of inventories recognised as an expense and included in profit or lossis as follows:
2013 2012
RMB’000 RMB’000Carrying amount of inventories sold . . . . . . . . . . . . . . . . . . . . . . . . . 99,693,863 96,551,236Write down of inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,230,579 17,257
100,924,442 96,568,493
44
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21 Trade and bills receivable
Note 2013 2012
RMB’000 RMB’000Trade receivablesTrade receivables due from third parties . . . . . . . . . . . . . 59,188,622 54,575,678
Trade receivables due from related parties . . . . . . . . . . . . 37(b) 691,887 525,379
59,880,509 55,101,057- - - - - - - - - - - - - - - - - - - - - - - -
Bills receivableBank acceptance bills . . . . . . . . . . . . . . . . . . . . . . . . . . 2,224,077 2,077,639
Commercial acceptance bills . . . . . . . . . . . . . . . . . . . . . 2,966,686 2,106,339
Letter of credit receivables . . . . . . . . . . . . . . . . . . . . . . 797,956 1,040,701
5,988,719 5,224,679- - - - - - - - - - - - - - - - - - - - - - - -
65,869,228 60,325,736
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,603 496,705
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,533,625 59,829,031
65,869,228 60,325,736
(a) Ageing analysis
At the end of the reporting period, the ageing analysis of trade receivables due from third parties is
as follows:
2013 2012
RMB’000 RMB’000Not past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,902,507 37,429,834
Less than 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,698,668 11,960,125
90 days to 1 year past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,574,686 6,982,642
1 year and above past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,352,729 1,690,068
63,528,590 58,062,669
Less: Allowance for doubtful debts . . . . . . . . . . . . . . . . . . . . . . . . . . (4,339,968) (3,486,991)
59,188,622 54,575,678
(b) Impairment of trade receivables due from third parties
Impairment losses in respect of trade receivables due from third parties are recorded using an
allowance account unless the Group is satisfied that recovery of the amount is remote, in which
case the impairment loss is written off against the trade receivables due from third parties directly
(see note 3(l)).
The movement in the allowance for doubtful debts in respect of trade receivables due from third
parties during the year is as follows:
2013 2012
RMB’000 RMB’000At 1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,486,991 3,548,190
Exchange adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (519,285) (63,238)
Impairment loss recognised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,074,652 3,479,047
Collection of previously written-off debtors . . . . . . . . . . . . . . . . . . . . 410,501 –
Uncollectible amounts written off . . . . . . . . . . . . . . . . . . . . . . . . . . . (112,891) (3,477,008)
At 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,339,968 3,486,991
45
F-46
21 Trade and bills receivable (continued)
(b) Impairment of trade receivables due from third parties (continued)
As at 31 December 2013, specific allowance of RMB2,494,486,000 (2012: RMB2,304,302,000)
was recognised as a result from the assessment of the Group’s trade receivables due from third
parties of RMB4,353,560,000 (2012: RMB2,356,209,000) that were individually determined to be
impaired. The individually impaired trade receivables mainly relate to customers who are in
financial difficulties and the likelihood of recoverability is expected to be in doubt. The Group
does not hold any collateral over these balances.
(c) Trade receivables due from third parties that are neither past due nor impaired
The ageing analysis of trade receivables due from third parties that are neither individually nor
collectively considered to be impaired is as follows:
2013 2012
RMB’000 RMB’000Neither past due nor impaired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,543,893 36,723,255
Receivables that are neither past due nor impaired relate to a wide range of customers for whom
there was no recent history of default.
(d) Trade receivables due from related parties
The Group monitors the trade receivables due from related parties on an ongoing basis considering
the financial results of the related parties and repayments made by the related parties. As at the
reporting date, there was no indication that related parties would default on repayment.
22 Other receivables
Note 2013 2012
RMB’000 RMB’000Advance payments to suppliers . . . . . . . . . . . . . . . . . . . 1,605,242 2,387,940
Withholding taxes receivable . . . . . . . . . . . . . . . . . . . . . 4,620,008 4,797,043
Pledged deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,805,091 1,832,183
Gross amount due from third-party customers forcontract works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 227,664 1,339,784
Proceeds receivable from disposal of associates . . . . . . . . 23,900 38,900
Other non-trade receivables due from third parties . . . . . . 6,135,324 5,288,770
Non-trade receivables due from related parties . . . . . . . . . 37(b) 34,570 21,983
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 107,562
14,451,929 15,814,165
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,906 407,344
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,438,023 15,406,821
14,451,929 15,814,165
46
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23 Cash and cash equivalents
2013 2012
RMB’000 RMB’000Cash in hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,380 15,172
Deposits with banks and other financial institutions . . . . . . . . . . . . . . . 61,793,260 67,164,943
Highly liquid short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . 11,600,000 –
Cash and cash equivalents in the consolidated statement offinancial position and consolidated statement of cash flows . . . . . . . . 73,398,640 67,180,115
As at 31 December 2013, the Group had certain short-term investments purchased fromcommercial banks with maturity less than three months. These short-term investments were highlyliquid, readily convertible into known amounts of cash and are subject to an insignificant risk ofchanges in value. These short-term investments were all subsequently matured and settled inJanuary 2014.
24 Assets held for sale
According to an agreement entered into by the Company and a third party, the Company committedto sell certain of its property, plant and equipment to the third party with a total consideration ofRMB2,800,000,000. Pursuant to the agreement, the Company shall deliver the related property,plant and equipment to the third party before the end of March 2013. As a result, the relatedproperty, plant and equipment were classified as held for sale. The sale of the related property,plant and equipment was completed in two batches in the latter half of 2012 and the first half of2013 with a net gain of RMB761,188,000 and RMB986,498,000 recognised, respectively.
25 Capital, reserves and dividends
(a) Movements in components of equity
The reconciliation between the opening and closing balances of each component of the Group’sconsolidated equity is set out in the consolidated statement of changes in equity.
(b) Dividends payable to equity holders of the Company attributable to the previous financial years,approved and paid during the year
2013 2012
RMB’000 RMB’000Final dividend in respect of the previous financial years,
approved and paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . 15,495,429 12,088,632
(c) Capital surplus
Capital surplus represents the portion of the fair value of capital contributions made by theinvestors in excess of the registered capital.
(d) Statutory reserves
According to the relevant rules and regulations and the Articles of Association of the Company andcertain of its subsidiaries, the Company and the relevant subsidiaries are required to transfercertain of its profit after tax to the statutory reserves. The transfer to the reserves must be madebefore the distribution of dividends to investors. Statutory reserves can be used to reduce previousyears’ losses, if any, and may be converted into paid-in capital in proportion to the existing equityinterest of investors.
47
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25 Capital, reserves and dividends (continued)
(e) Exchange reserve
The exchange reserve comprises all foreign exchange differences arising from the translation of
financial statements of foreign operations. The reserve is dealt with in accordance with the
accounting policies set out in note 3(s)(ii).
(f) Fair value reserve
The fair value reserve comprises the cumulative net change in the fair value of available-for-sale
securities held at the end of the reporting period and is dealt with in accordance with the
accounting policies in notes 3(f) and 3(l).
(g) Other reserves
Other reserves comprise the following:
• share of the reserves movement of the associates and joint ventures other than profit or loss
and other comprehensive income;
• the accumulated changes in equity during the periods arising from transactions with equity
holders in their capacity as equity holders; and
• remeasurement of defined benefit obligations.
(h) Capital management
The Group’s Finance Committee under the board of directors is responsible for capital
management. The primary objectives when managing capital are to safeguard the Group’s ability to
continue as a going concern.
Treasury management department of the Group issues capital management policies that are in
compliance with the strategies set by the Finance Committee, and actively and regularly reviews
and manages the Group’s capital structure to maintain a balance between the higher returns that
might be possible with higher levels of borrowings and advantages and security afforded by a
sound capital position, and makes adjustments to the capital structure in light of changes in
economic conditions.
During 2013, the Group’s strategy, which was unchanged from 2012, was to maintain an
interest-bearing debt-to-equity ratio at a range of levels to support the operations and development
of the Group’s business in the long run. In order to maintain or adjust the ratio, the Group may
increase capital, request new loans, or raise new debt financing.
48
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25 Capital, reserves and dividends (continued)
(h) Capital management (continued)
The interest-bearing debt-to-equity ratio at 31 December 2013 and 2012 is as follows:
Note 2013 2012
RMB’000 RMB’000Current liabilities
Interest-bearing loans and borrowings . . . . . . . . . . . . . . 26 3,043,280 4,676,932
Non-current liabilities
Interest-bearing loans and borrowings . . . . . . . . . . . . . . 26 19,989,460 16,077,097
Net interest-bearing debt . . . . . . . . . . . . . . . . . . . . . . 23,032,740 20,754,029
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,266,116 75,023,608
Interest-bearing debt-to-equity ratio . . . . . . . . . . . . . . 26.70% 27.66%
Neither the Company nor its subsidiaries are subject to externally imposed capital requirements.
26 Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans
and borrowings. Information about the Group’s exposure to interest rate and currency risk is
disclosed in note 33.
2013 2012
RMB’000 RMB’000Short-term loans and borrowings:
– Intra-group guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,022,164 2,266,435
– Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,829 1,991,137
2,046,993 4,257,572- - - - - - - - - - - - - - - - - - - - - - - -
Long-term loans and borrowings:
– Intra-group guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,350,848 14,463,529
– Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,643,560 1,047,881
– Corporate bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 991,339 985,047
20,985,747 16,496,457- - - - - - - - - - - - - - - - - - - - - - - -
23,032,740 20,754,029
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,989,460 16,077,097
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,043,280 4,676,932
23,032,740 20,754,029
49
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26 Interest-bearing loans and borrowings (continued)
Terms and repayment schedule
Terms and conditions of outstanding loans and borrowings are as follows:
Total 1 year or less 1 to 5 years over 5 years
RMB’000 RMB’000 RMB’000 RMB’000Intra-group guaranteed bank loans:
Euro (“EUR”) – variable at 1.41% ~ 1.92% p.a. . . 3,570,615 576,927 2,993,688 –
Japanese yen – variable at 0.97% ~ 1.28% p.a. . . 808,588 808,588 – –
RMB – variable at 5.9% p.a. . . . . . . . . . . . . . . . 577,500 157,500 420,000 –
Indian rupee – variable at 9.9% ~ 11.75% p.a. . . 1,213,576 1,213,576 – –
United States dollar (“USD”)– fixed at 4.33% p.a. . . . . . . . . . . . . . . . . . . 2,725,605 – 2,725,605 –
USD – variable at 1.68% ~ 2.71% p.a. . . . . . . . . 11,472,250 – 11,472,250 –
Ethiopian birr – fixed at 9.5% p.a. . . . . . . . . . . . 4,878 – 4,878 –
20,373,012 2,756,591 17,616,421 –- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Unsecured bank loan:
Bangladeshi taka – variable at 14.5% p.a. . . . . . 24,176 24,176 – –
RMB – variable at 5.9% ~ 6.55% p.a. . . . . . . . . 1,643,560 261,860 857,379 524,321
Singapore dollar – fixed at 2.5% p.a. . . . . . . . . . 653 653 – –
1,668,389 286,689 857,379 524,321- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Corporate bond:
RMB – fixed at 5.30% p.a. . . . . . . . . . . . . . . . . 991,339 – 991,339 –- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
23,032,740 3,043,280 19,465,139 524,321
The carrying amount of the above loans and borrowings approximates to the fair value.
Certain of the Group’s banking facilities are subject to the fulfilment of covenants relating to
certain of the borrower’s statement of financial position ratios, as are commonly found in lending
agreements with financial institutions. If the Group were to breach the covenants, the draw down
facilities would become payable on demand. The Group regularly monitors its compliance with
these covenants. Further details of the Group’s management of liquidity risk are set out in note
33(b). As at 31 December 2013, none of the covenants relating to draw down facilities had been
breached (2012: nil).
Corporate bond
On 11 May 2012, Proven Honour Capital Limited, a wholly-owned subsidiary of the Company,
issued a corporate bond with a principal amount of RMB1,000,000,000 with three years maturity at
an annual interest rate of 5.30%. This corporate bond is fully guaranteed by the Company.
50
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27 Trade and bills payable
Note 2013 2012
RMB’000 RMB’000Trade payablesTrade payables due to related parties . . . . . . . . . . . . . . . 37(b) 760,992 840,276
Trade payables due to third parties . . . . . . . . . . . . . . . . . 30,529,061 32,695,375
31,290,053 33,535,651- - - - - - - - - - - - - - - - - - - - - - - -
Bills payableBank acceptance bills . . . . . . . . . . . . . . . . . . . . . . . . . . 377,876 1,793,980
Letter of credit payables . . . . . . . . . . . . . . . . . . . . . . . . 312,551 4,942,669
690,427 6,736,649- - - - - - - - - - - - - - - - - - - - - - - -
31,980,480 40,272,300
28 Other payables
Note 2013 2012
RMB’000 RMB’000Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633,926 1,174,085
Advances received . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,694,299 8,661,471
Accrued expenses
– Staff related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,819,536 14,414,020
– Supplies related . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,777,394 9,797,444
Other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,823,759 5,640,130
Purchase of property, plant and equipment . . . . . . . . . . . 2,053,212 1,759,096
Non-trade payables due to third parties . . . . . . . . . . . . . . 14,606,938 11,548,973
Non-trade payables due to related parties . . . . . . . . . . . . 37(b) 62,962 53,149
Gross amount due to third-party customers forcontract works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 416,334 2,330,975
67,888,360 55,379,343
29 Construction contracts
The aggregate amount of costs incurred plus recognised profits less recognised losses to date for
the Group, included in the gross amount due from/to third-party customers for contract works as at
31 December 2013, is RMB8,067,442,000 (2012: RMB26,722,664,000).
30 Employee post-employment benefits
(a) Defined contribution retirement plan
Pursuant to the relevant laws and regulations, the Group contributes to defined contribution
retirement plans for the respective group entities’ employees. The plans are managed either by the
government organisation at the location of the respective group entities or by the independent
trustees. The amount of contributions made to the retirement schemes is calculated using the
method compliant with the respective laws and regulations concerned.
51
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30 Employee post-employment benefits (continued)
(b) Defined benefit post-employment plan
Effective from 8 October 2007, the Group launched a defined benefit post-employment plan to
improve the benefits available to employees. The plan covers employees employed under the group
entities incorporated in the PRC. The plan is managed by the Group. There is no separate fund set
up for the plan.
The plan exposes the Group to actuarial risks, such as interest rate risk and longevity risk.
Information about the plan is disclosed below:
(i) The amounts recognised in the consolidated statement of financial position are as follows:
2013 2012
RMB’000 RMB’000Present value of obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 9,608,257 9,686,076
(ii) Movement in the present value of the defined benefit obligations
2013 2012
RMB’000 RMB’000At 1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,686,076 8,391,812
Remeasurements: actuarial losses . . . . . . . . . . . . . . . . . . . . . . 719,613 290,417
10,405,689 8,682,229- - - - - - - - - - - - - - - - - - - - - - - -
Benefits paid by the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,604,363) (1,259,588)
Past service credit resulting from a plan amendment . . . . . . . . . (1,169,118) –
Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,506,912 1,538,375
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469,007 411,199
Acquisition through business combinations . . . . . . . . . . . . . . . – 313,388
Transfer from related parties . . . . . . . . . . . . . . . . . . . . . . . . . 130 473
At 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,608,257 9,686,076
During the year ended 31 December 2013, certain terms of the defined benefit
post-employment plan were amended by the Group regarding the calculation of future
benefits to be received by the employees. As a result of the plan amendment, the Group’s
defined benefit obligations decreased by RMB1,169,118,000 (2012: nil), which was
recognised as past service credit in profit or loss immediately.
52
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30 Employee post-employment benefits (continued)
(b) Defined benefit post-employment plan (continued)
(iii) Amounts recognised in the consolidated statement of profit or loss and other comprehensive
income are as follows:
Note 2013 2012
RMB’000 RMB’000Restated(Note 4)
Current service cost . . . . . . . . . . . . . . . . . . . . . 7 2,506,912 1,538,375
Past service credit . . . . . . . . . . . . . . . . . . . . . . . 7 (1,169,118) –
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 469,007 411,199
Total amounts recognised in profit or loss . . . . . . 1,806,801 1,949,574
Actuarial losses recognised in othercomprehensive income . . . . . . . . . . . . . . . . . . 719,613 290,417
- - - - - - - - - - - - - - - - - - - - - - - -
Total defined benefit costs . . . . . . . . . . . . . . . . . 2,526,414 2,239,991
The past service credit and current service cost are recognised in the following line items in
the consolidated statement of profit or loss:
2013 2012
RMB’000 RMB’000Restated(Note 4)
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342,182 241,025
Research and development expenses . . . . . . . . . . . . . . . . . . . . 569,528 753,238
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,717 332,364
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,367 211,748
1,337,794 1,538,375
The interest cost on defined benefit obligations is recognised in finance expenses within the
consolidated statement of profit or loss.
(iv) Significant actuarial assumptions and sensitivity analysis are as follows:
2013 2012
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.90% 4.90%
Future salary increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.00% 5.00%
The below analysis shows how the defined benefit obligations as at 31 December 2013
would have increased (decreased) as a result of 1% change in the significant actuarial
assumptions:
Increase in 1% Decrease in 1%
RMB’000 RMB’000Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (202,758) 211,617
Future salary increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,939 (44,435)
The above sensitivity analysis is based on the assumption that changes in actuarial
assumptions are not correlated and therefore it does not take into account the correlations
between the actuarial assumptions.
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31 Provisions
Note 2013 2012
RMB’000 RMB’000Provision for warranties . . . . . . . . . . . . . . . . . . . . . . . . (b) 2,962,744 2,407,314
Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) 2,536,570 1,827,724
5,499,314 4,235,038
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 781,688 585,855
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,717,626 3,649,183
5,499,314 4,235,038
(a) Movement in provisions during the year is shown as below:
Provision forwarranties Other provisions Total
RMB’000 RMB’000 RMB’000At 1 January 2012 . . . . . . . . . . . . . . . . . . . . . . . . . 1,961,702 1,841,685 3,803,387
Provisions made during the year . . . . . . . . . . . . . . . 2,844,413 1,384,256 4,228,669
Provisions utilised during the year . . . . . . . . . . . . . . (2,398,801) (1,398,217) (3,797,018)
At 31 December 2012 and 1 January 2013 . . . . . . . . 2,407,314 1,827,724 4,235,038- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Provisions made during the year . . . . . . . . . . . . . . . 3,491,145 1,331,725 4,822,870
Provisions utilised during the year . . . . . . . . . . . . . . (2,935,715) (622,879) (3,558,594)
At 31 December 2013 . . . . . . . . . . . . . . . . . . . . . . . 2,962,744 2,536,570 5,499,314
(b) Provision for warranties
The provision for warranties relates primarily to equipment sold during the year. The provision is
determined based on estimates made from historical warranty data associated with similar
products and services and anticipated rates of warranty claims for the products. The Group expects
to settle the majority of the liability within the next twelve months.
(c) Other provisions
Other provisions are mainly for onerous contracts and outstanding litigations and claims.
32 Other non-current assets
2013 2012
RMB’000 RMB’000Taxes recoverable in foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . 483,115 754,233
Prepayment for acquisition of long-term leasedhold land . . . . . . . . . . . 180,856 –
Other long-term deferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,944 228,525
973,915 982,758
54
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33 Financial risk management and fair values of financial instruments
Exposure to credit, liquidity, interest rate and currency risk arises in the normal course of theGroup’s business. The Group’s exposure to these risks and the financial risk management policiesand practices used by the Group to manage these risks are described below.
(a) Credit risk
The Group’s credit risk is primarily attributable to cash and cash equivalents and trade and otherreceivables. Management has a credit policy in place and the exposures to these credit risks aremonitored on an ongoing basis.
The majority of the Group’s cash and cash equivalents are deposited with banks or financialinstitutions, which management believes are of high credit quality.
In respect of trade and other receivables, the Group regularly performs assessment ofcreditworthiness on all customers for the Group’s commercial transactions to monitor the riskarising from customers’ inability or unwillingness to make full and timely payments. Theseevaluations focus on the customer’s current ability to pay, historical payment records and take intoaccount information specific to the customer as well as pertaining to the country and economicenvironment in which the customer operates.
The credit period of trade receivables is agreed and reviewed for each individually significantproject. The Group has a department to monitor and control the collection of past due tradereceivables. The Group will consider allowance for debts due from customers with poor creditrecords. Further transactions with these customers are carefully analysed and authorised by seniormanagement of the Group. If necessary, the Group requires collateral from the customers.
The Group provides funding to customers in certain limited situations. These funding are subjectto credit analysis for evaluation of associated credit risk and shall be approved by seniormanagement of the Group. For significant funding provided, covenants are contained in thearrangements to protect the Group against credit deterioration of the customers. In certaincircumstances, the Group would consider transferring the credit risk to third parties. The creditrisk exposure of these funding is monitored on an ongoing basis and provision for impairmentlosses is made where that the prospect of recovery is remote.
In most cases, the Group’s exposure to credit risk is influenced mainly by the individualcharacteristics of each customer rather than the country in which the customers operate andtherefore significant concentrations of credit risk primarily arise when the Group has significantexposure to individual customers. At the end of the reporting period, approximately 17% (2012:12%) of total trade receivables was due from one customer of the Group.
Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from tradeand other receivables are set out in note 21 and note 22.
(b) Liquidity risk
The Group has established a treasury management system for cash flow planning, budgeting, andforecasting to regularly monitor current and expected liquidity requirements, to ensure that itmaintains sufficient reserves of cash and readily realisable marketable securities and adequatecommitted lines of funding from major financial institutions to meet its liquidity requirements inthe short and longer term. A financial risk control center and global liquidity risk monitoring teamwas also established in London to help with the Group’s global cash and liquidity management.
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33 Financial risk management and fair values of financial instruments (continued)
(b) Liquidity risk (continued)
The following tables show the remaining contractual maturities at the end of the reporting period
of the Group’s non-derivative financial liabilities, which are based on contractual undiscounted
cash flows (including interest payments computed using contractual rates or, if floating, based on
rates current at the end of the reporting period) and the earliest date the Group can be required to
pay:
2013Contractual undiscounted cash outflow
Carryingamount Total
Within1 year or
on demand
More than1 year butless than5 years
More than5 years
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Interest-bearing loans and borrowings . . . 23,032,740 24,416,304 3,640,837 20,166,912 608,555
Trade and bills payable . . . . . . . . . . . . . 31,980,480 31,980,480 31,980,480 – –
Other payables, excluding other taxespayable, staff benefits payable,advances received and other provisions 23,538,167 23,538,167 23,538,167 – –
78,551,387 79,934,951 59,159,484 20,166,912 608,555
2012Contractual undiscounted cash outflow
Carryingamount Total
Within1 year or
on demand
More than1 year butless than5 years
More than5 years
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Interest-bearing loans and borrowings . . . 20,754,029 22,169,369 5,240,598 16,928,771 –
Trade and bills payable . . . . . . . . . . . . . 40,272,300 40,272,300 40,272,300 – –
Other payables, excluding other taxespayables, staff benefits payable,advances received and other provisions 16,718,548 16,718,548 16,718,548 – –
77,744,877 79,160,217 62,231,446 16,928,771 –
(c) Interest rate risk
The Group’s interest rate risk arises primarily from non-current interest-bearing loans and
borrowings issued. Borrowings issued at variable rates and at fixed rates expose the Group to cash
flow interest rate risk and fair value interest rate risk respectively. The Group’s interest rate profile
as monitored by management is set out in (i) below.
56
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33 Financial risk management and fair values of financial instruments (continued)
(c) Interest rate risk (continued)
(i) Interest rate profile
The following table details the interest rate profile of the Group’s net non-current borrowings as at
31 December:
2013 2012
Effectiveinterest rate
Effectiveinterest rate
% RMB’000 % RMB’000Net fixed rate non-current borrowings:Interest-bearing loans and borrowings . . . . . . . . 4.59 3,721,822 4.60 3,788,313
Other receivables . . . . . . . . . . . . . . . . . . . . . . – – 1.98 (69,894)
3,721,822 3,718,419- - - - - - - - - - - - - - - - - - - -
Net variable rate non-current borrowings:Interest-bearing loans and borrowings . . . . . . . . 2.41 16,267,638 2.24 12,288,784
Other receivables . . . . . . . . . . . . . . . . . . . . . . – – 4.20 (337,450)
16,267,638 11,951,334- - - - - - - - - - - - - - - - - - -
Total net non-current borrowings . . . . . . . . . . . 19,989,460 15,669,753
Net fixed rate non-current borrowings as apercentage of total net non-current borrowings . . . 18.62% 23.73%
(ii) Sensitivity analysis
As at 31 December 2013, it is estimated that a general increase/decrease of 50 basis points in
interest rate, with all other variables held constant, would have decreased/increased the Group’s
profit after tax and retained earnings by approximately RMB81,468,000 (2012: RMB64,850,000).
The sensitivity analysis above indicates the instantaneous change in the Group’s profit after tax
and retained earnings that would arise assuming that the change in interest rates had occurred at the
end of the reporting period and had been applied to re-measure those financial instruments held by
the Group which expose the Group to fair value interest rate risk at the end of the reporting period.
In respect of the exposure to cash flow interest rate risk arising from variable rate non-derivative
instruments held by the Group at the end of the reporting period, the impact on the Group’s profit
after tax and retained earnings is estimated as an annualised impact on interest expense or income
of such a change in interest rates. The analysis is performed on the same basis for 2012.
(d) Currency risk
The Group conducts business globally and is exposed to currency risk primarily through external
and intra-group sales and purchases, which give rise to receivables, payables and cash and cash
equivalent balances that are denominated in a foreign currency, i.e. a currency other than the
functional currency of the operations to which the transactions relate. The functional currency of
the Group and the individual subsidiaries that compose the Group may be different. The currencies
giving rise to this risk are primarily USD, EUR and Hong Kong dollar (“HKD”).
57
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33 Financial risk management and fair values of financial instruments (continued)
(d) Currency risk (continued)
The Group has established a currency exposure management system that mitigates currency riskthrough various foreign exchange measures including:
– matching currencies between procurements and sales transactions.
– balancing cash inflows and outflows of foreign currencies.
– selecting appropriate financial measures which are in line with the Company’s riskmanagement policies and strategies.
– monitoring foreign currencies with heightened remittance risk.
(i) Exposure to currency risk
The following table details the Group’s exposure at the end of the reporting period to currency riskarising from recognised monetary assets and liabilities denominated in a currency other than thefunctional currency of the entity to which they relate.
Exposure to foreign currencies (expressed in RMB)
2013 2012
USD’000 EUR’000 HKD’000 USD’000 EUR’000 HKD’000Other investments . . . . . . . – – – 12,585 – –
Trade and bills receivable . . 90,281,149 12,427,986 143 89,028,651 13,275,351 321
Other receivables . . . . . . . . 22,865,810 4,027,776 10,574 27,085,403 11,086,676 33,912
Cash and cash equivalents . . 12,996,287 767,848 – 5,418,164 985,372 –
Interest-bearing loans andborrowings . . . . . . . . . . . (29,840,041) (5,230,928) – (25,367,559) (3,576,188) –
Trade and bills payable . . . . (56,511,642) (6,807,680) (2,655,306) (63,650,127) (7,331,473) (4,992,862)
Other payables . . . . . . . . . . (7,657,923) (1,238,930) (3,524) (12,573,277) (9,545,161) (8,395)
Total exposure . . . . . . . . . . 32,133,640 3,946,072 (2,648,113) 19,953,840 4,894,577 (4,967,024)
(ii) Sensitivity analysis
The following table indicates the instantaneous change in the Group’s profit after tax and retainedearnings that would arise if foreign exchange rates to which the Group has significant exposure atthe end of the reporting period had changed at that date, assuming all other risk variables remainedconstant.
2013 2012
Increase/(decrease)in foreign
exchange rates
Increase/(decrease) on
profit after taxand retained
earnings
Increase/(decrease)in foreign
exchange rates
Increase/(decrease) on
profit after taxand retained
earnings
RMB’000 RMB’000USD . . . . . . . . . . . . . . . . . . . . . . . . . 5% (1,453,758) 5% (1,009,410)
(5%) 1,453,758 (5%) 1,009,410
EUR . . . . . . . . . . . . . . . . . . . . . . . . . 5% (172,894) 3% (140,408)
(5%) 172,894 (3%) 140,408
HKD . . . . . . . . . . . . . . . . . . . . . . . . 5% 116,032 5% 211,072
(5%) (116,032) (5%) (211,072)
58
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33 Financial risk management and fair values of financial instruments (continued)
(d) Currency risk (continued)
(ii) Sensitivity analysis (continued)
Results of the analysis as presented in the above table represent an aggregation of theinstantaneous effects on each of the group entities’ profit after tax and retained earnings measuredin the respective functional currencies, translated into RMB at the exchange rate ruling at the endof the reporting period for presentation purposes.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied tore-measure those financial instruments held by the Group which expose the Group to foreigncurrency risk at the end of the reporting period, including inter-company payables and receivableswithin the Group which are denominated in a currency other than the functional currencies of thelender or the borrower. The analysis excludes differences that would result from the translation offinancial statements of foreign operations into the Group’s presentation currency. The analysis isperformed on the same basis for 2012.
(e) Fair value measurement
(i) Financial instruments measured at fair value
The following table presents the carrying value of the Group’s financial instruments measured atfair value at the end of the reporting period on a recurring basis, categorised into the three-levelfair value hierarchy as defined in IFRS 13, Fair value measurement. The level into which a fairvalue measurement is classified is determined with reference to the observability and significanceof the inputs used in the valuation technique as follows:
– Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quotedprices in active markets for identical assets or liabilities at the measurement date
– Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs whichfail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs areinputs for which market data are not available.
– Level 3 valuations: Fair value measured using significant unobservable inputs
Fair value at31 December
2013
Fair value measurements as at31 December 2013 categorised into
Fair value at31 December
2012
Fair value measurements as at31 December 2012 categorised into
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Recurring fair value measurementsAssets:Available-for-sale financial assets:
– Listed equity securities . . . . . 118,047 118,047 – – 76,352 76,352 – –– Debt securities . . . . . . . . . . 633 633 – – 621 621 – –– Wealth management products . . 8,544,966 – 8,544,966 – 4,456,222 – 4,456,222 –
Held-for-trading equity securities . . – – – – 12,585 12,585 – –
Valuation techniques and inputs used in Level 2 fair value measurements
The fair value of wealth management products in Level 2 is the estimated amount that the Groupwould receive upon expiry or termination at the end of the reporting period, taking into account therelated current interest rates.
During the year ended 31 December 2013 and 2012, there were no significant transfers amonginstruments in Level 1, Level 2 and Level 3.
59
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33 Financial risk management and fair values of financial instruments (continued)
(e) Fair value measurement (continued)
(ii) Fair values of financial instruments carried at other than fair value
The carrying amounts of the Group’s financial instruments carried at cost or amortised cost are not
materially different from their fair values as at 31 December 2013 and 2012 except for the
following financial instruments:
Carryingamount at
31 December2013
Fair value at31 December
2013
Fair value measurements as at31 December 2013 categorised into
Carryingamount at
31 December2012
Fair value at31 December
2012Level 1 Level 2 Level 3
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000Non-current trade receivables . . . . . . . 335,603 284,089 – – 284,089 496,705 355,704
Non-current other receivables . . . . . . . 13,906 10,911 – – 10,911 69,894 58,392
Non-current fixed rate interest-bearingloans and borrowings . . . . . . . . . . . (3,721,822) (3,468,628) – – (3,468,628) (3,788,313) (3,607,684)
Valuation techniques and inputs used in Level 3 fair value measurements
The fair values of the non-current trade receivables, non-current loans receivable and non-current
fixed rate interest-bearing loans and borrowings are estimated as being the present values of future
cash flows, discounted at interest rates based on the government yield curve as at 31 December
2013 plus an adequate constant credit spread, adjusted for the Group’s own credit risk.
34 Operating leases
(a) Leases as lessee
As at 31 December 2013 and 2012, the total future minimum lease payments under non-cancellable
operating leases are payable as follows:
2013 2012
RMB’000 RMB’000Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618,539 472,303
After 1 year but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877,704 576,649
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,817 57,548
1,561,060 1,106,500
The Group leases a number of warehouses, factory facilities, office premises and staff apartments
under operating leases. The leases typically run for an initial period of one to five years. None of
the leases includes contingent rentals.
During the year ended 31 December 2013, RMB2,391,969,000 was recognised as an expense in the
consolidated statement of profit or loss in respect of operating leases (2012: RMB2,334,125,000).
60
F-61
34 Operating leases (continued)
(b) Leases as lessor
The Group leases out certain of its properties under operating leases (see note 5 and note 12). As at
31 December 2013 and 2012, the Group’s total future minimum lease payments under
non-cancellable operating leases are receivable as follows:
2013 2012
RMB’000 RMB’000Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,587 100,448
After 1 year but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,434 8,720
24,021 109,168
During the year ended 31 December 2013, RMB77,201,000 was recognised as rental income in the
consolidated statement of profit or loss (2012: RMB114,044,000).
35 Capital commitments
(a) Acquisition and construction of buildings
Capital commitments of the Group in respect of acquisition and construction of buildings
outstanding at 31 December 2013 and 2012 not provided for in the consolidated financial
statements were as follows:
2013 2012
RMB’000 RMB’000Contracted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,378,248 2,094,272
Authorised but not contracted for . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,944,379 4,375,599
6,322,627 6,469,871
(b) Other capital commitments
Other contracted capital commitments outstanding at 31 December 2013 and 2012 not provided for
in the consolidated financial statements were as follows:
2013 2012
RMB’000 RMB’000Establishment of an associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 25,000
36 Contingencies
(i) In July 2011, InterDigital Corporation (“IDC”) filed a complaint with the United States
International Trade Commission (the “USITC” or “Commission”) and the United States District
Court for the District of Delaware against Huawei Technologies Co., Ltd. (“Huawei Tech”) and
Futurewei Technologies Inc. (“Futurewei”), both wholly-owned subsidiaries of the Company. The
complaint alleged that sales of imported 3G wireless devices by the said subsidiaries within the
United States had infringed IDC’s 3G wireless patents and requested for issuance of exclusion
order and cease and desist order in relation to the accused 3G wireless devices concerned (“the first
complaint”).
61
F-62
36 Contingencies (continued)
(i) (continued)
In December 2011, Huawei Tech filed a complaint against IDC in the PRC for violation of the fair,reasonable, and non-discriminatory (“FRAND”) policies and the PRC’s Anti-Monopoly Law. InJune 2012, Huawei Tech filed another complaint with the European Commission (the “EC”) torequest an investigation into the licensing fees requested by IDC, which it deemed exploitative,discriminatory, and in violation of the FRAND policies as well as the EC’s antitrust law.
On 2 January 2013, IDC filed another two complaints with the USITC and the United StatesDistrict Court for the District of Delaware against Huawei Tech, Futurewei, and Huawei DeviceUSA Inc. (“USA Device”), another wholly-owned subsidiary of the Company. The complaintsfurther alleged that the sales of certain 3G and 4G wireless devices sold by the said subsidiarieswithin the United States had infringed three of IDC’s other patents.
On 4 February 2013, the Shenzhen Intermediate People’s Court ruled that IDC had violated thePRC’s Anti-Monopoly Law and ordered IDC to compensate the Group for damages of RMB20million. The Court also ruled that the royalty rates licenses to Huawei Tech for IDC’s Chineseessential standard patents in wireless communication should not exceed 0.019%. of the actual salesprices of Huawei Tech’s wireless devices.
On 11 March 2013, IDC filed appeals to the Guangdong Higher People’s Court in respect of therulings made by the Shenzhen Intermediate People’s Court. On 25 October 2013, the GuangdongHigher People’s Court upheld the Shenzhen Intermediate People’s Court’s ruling which is the finalruling.
On 28 June 2013 and 19 December 2013, the USITC ruled in favor of Huawei Tech, Futurewei andUSA Device in respect of the first complaint in the initial determination and the finaldetermination, respectively.
On 23 December 2013, Huawei Tech, Futurewei and USA Device reached a settlement agreementwith IDC to withdraw or dismiss all the ongoing legal actions against each other. Under thesettlement agreement, the parties will solve their dispute through arbitration.
At this stage, the Group is unable to predict the outcome of the litigation, or reasonably estimate arange of possible loss, if any, given the current preliminary status of the litigation.
(ii) On 23 May 2012, Flashpoint Technology Inc. (“Flashpoint”) filed a complaint with the USITC,requesting the Commission to commence an investigation under Section 337 of the Tariff Act of1930 into certain electronic imaging devices manufactured by four alleged infringing companiesand their affiliates by reason of patent infringement and requested for issuance of an exclusionorder and cease and desist order in relation to the electronic imaging devices concerned. HuaweiTech and Futurewei were named as respondents. On 2 August 2012, the Administrative Law Judgegranted a joint motion to substitute Huawei Device Co., Ltd. (“Huawei Device”) and USA Devicefor Huawei Tech and Futurewei. Flashpoint also filed another complaint before the United StatesDistrict Court for the District of Delaware for the same reason against Huawei Device and USADevice. The legal action before District Court of Delaware was stayed.
On 30 September 2013, the Administrative Law Judge of the USITC issued an initial determinationin respect of Flashpoint’s complaint with USITC that Huawei Device and USA Device did notinfringe the asserted patents. At this stage, the Group is unable to predict the outcome of thelitigation, or reasonably estimate a range of possible loss, if any, given the current status of thislitigation.
62
F-63
36 Contingencies (continued)
(iii) On 24 July 2012, Technology Properties Limited LLC (“TPL”) filed a complaint with the USITC,requesting the Commission to commence an investigation under Section 337 of the Tariff Act of1930 into certain wireless consumer electronics devices and components manufactured by thirteencompanies and their affiliates by reason of alleged patent infringement and requested for issuanceof an exclusion order and cease and desist order in relation to the electronic products concerned.Huawei Tech was named as one of the thirteen companies. On 21 August 2012, the USITC decidedto institute Section 337 investigation in relation to the electronic products concerned. TPL alsofiled another complaint before the United States District Court for the Northern District ofCalifornia for the same reason. On 6 September 2013, the Administrative Law Judge of the USITCissued an initial determination that the Group did not infringe the asserted patent. On 19 February2014, the USITC issued a final determination that the Group did not infringe the asserted patent.
37 Related parties
(a) Key management personnel remuneration
Remuneration for key management personnel of the Group is as follows:
2013 2012
RMB’000 RMB’000Short-term employee benefits and post-employment benefits . . . . . . . . 25,178 28,724
Total remuneration is included in “personnel expenses” (see note 7).
(b) Other related party transactions
Transactions with associates and joint ventures
2013 (RMB’000)
Sales PurchasesServiceincome
Rentalincome
Interestincome
Serviceexpenses
Rentalexpenses
Designatedloans lend
out
TD Tech . . . . . . . . . . . . . . . . . . 1,151,604 3,059,023 3,178 – – – – –
Huawei Marine . . . . . . . . . . . . . . 129,827 355,063 9,556 1,557 – 31,906 – –
CD Investment . . . . . . . . . . . . . . . – – – – – – 241,251 –
Tianwen Digital Media . . . . . . . . . . – 350 1,707 – – – – –
Chinasoft International Technology . . . .
Services Ltd . . . . . . . . . . . . . . . . – – – – – 551,605 – –
iSoftStone Technology Service CompanyLimited . . . . . . . . . . . . . . . . . – – – – – 795,909 – –
1,281,431 3,414,436 14,441 1,557 – 1,379,420 241,251 –
2012 (RMB’000)
Sales PurchasesServiceincome
Rentalincome
Interestincome
Serviceexpenses
Rentalexpenses
Designatedloans lend
out
TD Tech . . . . . . . . . . . . . . . . . . 591,696 2,159,656 3,126 – – – – –
Huawei Digital HK . . . . . . . . . . . . 237,898 – 32,290 – – – – –
Huawei Marine . . . . . . . . . . . . . . 132,131 360,209 7,892 1,910 – 95,341 – –
CD Investment . . . . . . . . . . . . . . . – – 3,699 – – – 59,812 –
Beijing Huawei Longshine . . . . . . . . – – – – 330 – – 48,422
961,725 2,519,865 47,007 1,910 330 95,341 59,812 48,422
63
F-64
37 Related parties (continued)
(b) Other related party transactions (continued)
Balances with associates and joint ventures
31 December 2013 (RMB’000)
Tradereceivables
Otherreceivables
Tradepayables
Otherpayables
TD Tech . . . . . . . . . . . . . . . . . . . . . . 492,301 23,873 179,620 –
Huawei Marine . . . . . . . . . . . . . . . . . 192,603 10,697 226,266 61,721
CD Investment . . . . . . . . . . . . . . . . . . 5,276 – 164,985 1,241
Tianwen Digital Media . . . . . . . . . . . . 1,707 – 200 –
Chinasoft International TechnologyServices Ltd. . . . . . . . . . . . . . . . . . – – 36,427 –
iSoftStone Technology ServiceCompany Limited . . . . . . . . . . . . . . – – 153,494 –
691,887 34,570 760,992 62,962
31 December 2012 (RMB’000)
Tradereceivables
Otherreceivables Trade payables Other payables
TD Tech . . . . . . . . . . . . . . . . . . . . . . 329,884 20,616 552,445 –
Huawei Marine . . . . . . . . . . . . . . . . . 165,219 1,367 248,397 53,149
CD Investment . . . . . . . . . . . . . . . . . . 30,276 – 39,434 –
525,379 21,983 840,276 53,149
38 Group enterprises
(a) Parent and ultimate controlling party
The Group’s ultimate controlling party is the Union.
64
F-65
38 Group enterprises
(b) Major subsidiaries
Name of subsidiary
Place ofincorporationand business
Proportion ofownership interest Principal activity
2013 2012
Huawei Technologies Co., Ltd. . PRC 100% 100% Development, manufacture and saleof telecommunication productsand the technical support &maintenance of electricalequipment and spare parts
Huawei Software TechnologiesCo., Ltd. (“Huawei SoftwareTech”) . . . . . . . . . . . . . . . . .
PRC 100% 100% Development, manufacture and saleof software and new products inmobile communication area andrendering of related services
Shanghai Huawei TechnologiesCo., Ltd.. . . . . . . . . . . . . . . .
PRC 100% 100% Development, sale, consultancyservice and after-sale service oftelecommunication equipment
Beijing Huawei DigitalTechnologies Co., Ltd . . . . . .
PRC 100% 100% Development, sale, and technicalsupport of mobile communicationproducts, import and export ofgoods and techniques
Shenzhen Huawei TechnologiesSoftware Co., Ltd. . . . . . . . . .
PRC 100% 100% Development, manufacture, sale andprovide service of communicationsoftware and related products
HUAWEI TECHNICALSERVICE CO., LTD. . . . . . . .
PRC 100% 100% Installation, technology consultancyservice and maintenance oftelecommunication equipmentand auxiliary products
Huawei Machine Co., Ltd. . . . . PRC 100% 100% Development, manufacture and saleof telecommunication products;offering of technology services
HiSilicon Technologies Co.,Limited . . . . . . . . . . . . . . . .
PRC 100% 100% Design, development and sale ofsemiconductors oftelecommunication products
Huawei Tech. Investment Co.,Ltd (“Huawei TechInvestment”) . . . . . . . . . . . . .
Hong Kong 100% 100% Trading of imported materials, saleof overseas device (exclude theUnited States) and overseasmachineries
Huawei Device Co., Ltd. . . . . . . PRC 100% 100% Development, manufacture and saleof mobile communicationproducts and electrical parts
Huawei International Pte. Ltd. . . Singapore 100% 100% Trading of telecommunicationequipment
Huawei TechnologiesCoöperatief U.A. . . . . . . . . . .
Netherlands 100% 100% Investor of overseas subsidiaries
PT. Huawei Tech Investment . . . Indonesia 100% 100% Trading of telecommunicationequipment
Huawei Technologies Japan K.K. Japan 100% 100% Design, development, manufactureand sale of telecommunicationand information products, provideauxiliary products and services
Huawei Device (Hong Kong)Co., Ltd.. . . . . . . . . . . . . . . .
Hong Kong 100% 100% Sale and maintenance of electricalequipment and mobilecommunication products
65
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38 Group enterprises (continued)
(c) Acquisition of subsidiaries
(i) On 6 August 2013, Huawei Tech Investment, a wholly-owned subsidiary of the
Company, acquired 100%. equity interest in Caliopa NV (“Caliopa”) from third
parties for a consideration of EUR6,923,000 (equivalent to RMB56,204,000).
Caliopa is located in Belgium and principally engaged in developing silicon
photonics-based optical solutions in the telecommunication industry. In 2013, all of
Caliopa’s services were provided to entities within the Group.
(ii) On 10 December 2013, Huawei Technologies (Australia) PTY Ltd., a wholly-owned
subsidiary of the Company acquired 100%. equity interest in Fastwire PTY Limited
(“Fastwire”) from a third party for a consideration of USD19,052,000 (equivalent to
RMB117,213,000).
Fastwire is located in Sydney and provides Operation Supporting System services to
telecommunication operators.
In the period from the acquisition date to 31 December 2013, Fastwire contributed
revenue of RMB918,000 and net loss of RMB2,650,000 to the Group’s results. If the
acquisition had occurred on 1 January 2013, management estimate that consolidated
revenue would have been increased by RMB29,943,000, and consolidated profit for
the year would have been decreased by RMB9,297,000. In determining these
amounts, management have assumed that the fair value adjustments that arose on the
acquisition date would have been the same if the acquisition had occurred on 1
January 2013.
(iii) On 30 March 2012, Huawei Tech Investment, a wholly-owned subsidiary of the
Company, acquired the remaining 49%. stake in Huawei Digital Technologies (Hong Kong) Co., Limited (formerly “Huawei Symantec Technologies Co., Ltd.”) (“Huawei Digital HK”) from Symantec Hardware Holding LLC (“Symantec Hardware”) for a consideration of USD530,000,000 (equivalent to RMB3,336,767,000). As a result of this acquisition, the Group’s equity interest in Huawei Digital HK increased from 51% to 100% and Huawei Digital HK became a wholly-owned subsidiary of Huawei Tech Investment, which in turn is a wholly-owned subsidiary of the Company.
Huawei Digital HK is a Hong Kong-based joint venture established by Huawei Tech Investment and Symantec Hardware in 2008. Huawei Digital HK is principally engaged in research and development, production and sale of network storage and security products.
In the period from the acquisition date to 31 December 2012, Huawei Digital HK
contributed revenue of RMB3,224,747,000 and net loss of RMB68,801,000 to the
Group’s results. If the acquisition had occurred on 1 January 2012, management
estimate that consolidated revenue would have been increased by
RMB4,289,369,000, and consolidated profit for the year would have been decreased
by RMB375,091,000. In determining these amounts, management have assumed that
the fair value adjustments that arose on the acquisition date would have been the same
if the acquisition had occurred on 1 January 2012.
66
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38 Group enterprises (continued)
(c) Acquisition of subsidiaries (continued)
(iv) On 31 March 2012, Huawei Software Tech, a wholly-owned subsidiary of theCompany, acquired the remaining 48% stake in Beijing Huawei Longshine fromLongshine Information Technology Company Limited (“Longshine Information”) fora consideration of RMB115,966,000. As a result of this acquisition, the Group’sequity interest in Beijing Huawei Longshine increased from 52% to 100% and BeijingHuawei Longshine became a wholly-owned subsidiary of the Company.
Beijing Huawei Longshine is a China-based company established in 1996. BeijingHuawei Longshine is principally engaged in production and sale of networkcommunication products, computer hardware and software and provision of relatedservices.
In the period from the acquisition date to 31 December 2012, Beijing HuaweiLongshine contributed revenue of RMB130,140,000 and profit of RMB12,577,000 tothe Group’s results. If the acquisition had occurred on 1 January 2012, managementestimate that consolidated revenue would have been increased by RMB130,288,000,and consolidated profit for the year would have been decreased by RMB9,487,000. Indetermining these amounts, management have assumed that the fair valueadjustments that arose on the acquisition date would have been the same if theacquisition had occurred on 1 January 2012.
The above acquisitions had the following effect on the Group’s assets and liabilities onacquisition date:
Recognised values on acquisition
2013 2012
Caliopa FastwireHuawei Digital
HK
BeijingHuawei
Longshine
RMB’000 RMB’000 RMB’000 RMB’000note 38(c)(i) note 38(c)(ii) note 38(c)(iii) note 38(c)(iv)
Property, plant and equipment . . . . . . . . . . . . 1,512 980 87,618 2,292Available-for-sale securities . . . . . . . . . . . . . – – 25,980 –Intangible assets . . . . . . . . . . . . . . . . . . . . . 25,892 116,440 374,761 92,500Trade and other receivables . . . . . . . . . . . . . . 4,931 7,356 509,577 62,203Inventories . . . . . . . . . . . . . . . . . . . . . . . . . – – 542,722 15,731Cash and cash equivalents . . . . . . . . . . . . . . . 2,656 584 1,025,075 32,820Trade and other payables . . . . . . . . . . . . . . . (14,631) (14,865) (1,628,473) (24,368)Interest-bearing loans and borrowings . . . . . . (43) (1,200) (170,060) (63,422)Defined benefit obligations . . . . . . . . . . . . . . – – (313,388) –Deferred tax liabilities . . . . . . . . . . . . . . . . . (573) – (60,894) (13,875)
Total net identifiable assets . . . . . . . . . . . . . . 19,744 109,295 392,918 103,881
Acquisition-related costs (included in“administrative expenses” in consolidatedstatement of profit or loss) . . . . . . . . . . . . . 1,104 3,231 28,096 300
Consideration, satisfied by cash . . . . . . . . . . . 56,204 117,213 3,336,767 115,966
Analysis of the net outflow of cash and cash equivalents in respect of the acquisitions:
Cash consideration paid . . . . . . . . . . . . . . . . 52,806 117,213 3,336,767 115,966Cash and cash equivalents acquired . . . . . . . . (2,656) (584) (1,025,075) (32,820)
Net cash outflow . . . . . . . . . . . . . . . . . . . . . 50,150 116,629 2,311,692 83,146
67
F-68
38 Group enterprises (continued)
(c) Acquisition of subsidiaries (continued)
Goodwill
Goodwill was recognised as a result of the acquisitions as follows:
Recognised values on acquisition
2013 2012
Caliopa FastwireHuawei Digital
HK
BeijingHuawei
Longshine
RMB’000 RMB’000 RMB’000 RMB’000note 38(c)(i) note 38(c)(ii) note 38(c)(iii) note 38(c)(iv)
Total consideration . . . . . . . . . . . . . . . 56,204 117,213 3,336,767 115,966Fair value of pre-existing interest . . . . . – – 315,555 142,283Fair value of identifiable net assets . . . (19,744) (109,295) (392,918) (103,881)
36,460 7,918 3,259,404 154,368
Caliopa
The goodwill is attributable mainly to the skills and technical talent of Caliopa’s work force. Noneof the goodwill recognised is expected to be deductible for tax purposes.
Fastwire
The goodwill is attributable mainly to the skills and technical talent of Fastwire’s work force, andthe synergies expected to be achieved from integrating Fastwire into the Group’s existing networkbusiness. None of the goodwill recognised is expected to be deductible for tax purposes.
39 Accounting judgments and estimates
Sources of estimation uncertainty
Notes 15, 18, 30(b) and 33(e) contain information about the assumptions and their risk factorsrelating to valuation of goodwill impairment, defined benefit obligations and financialinstruments. Other key sources of estimation uncertainty are as follows:
(a) Revenue recognition
The Group’s sales of goods are recognised when the criteria set out in note 3(r) are met. Managerialjudgment is applied regarding, among other aspects, conformance with acceptance criteria and iftransfer of risks and rewards to the customer has taken place to determine if revenue should berecognised in the current year and the customer credit standing to assess whether payment is likelyor not to justify revenue recognition. Revenues may materially change if management’s assessmentof such criteria was determined to be inaccurate.
68
F-69
39 Accounting judgments and estimates (continued)
(a) Revenue recognition (continued)
Revenues from contracts involving solutions achieved through modification of complextelecommunication equipment or construction of entire telecommunication networks is recognisedon the percentage of completion basis when the outcome of contract can be estimated reliably.Based on the recent experience and the nature of the construction activities undertaken by theGroup, management makes estimates of the point at which the work is sufficiently advanced suchthat the costs to complete and revenue can be reliably estimated. As a result, until this point isreached the amounts due from customers for contract work as disclosed in note 29 will not includeprofits which the Group may eventually realise from the work done to date. In addition, actualoutcomes in terms of total cost or revenue may be higher or lower than estimated at the end of thereporting period due to changes in the project scope, under/over estimation of costs, realisation ofpenalties and other factors, which would affect the revenue and profit recognised in future years asan adjustment to the amounts recorded to date.
(b) Allowance for doubtful receivables
As described in note 33(a), credit risks of customers are regularly assessed with reference to theestimated future cash flow of an individual debtor or a portfolio of debtors and changes in thefinancial condition that have an adverse effect on the debtor, and allowances are recorded forestimated losses. If the financial conditions of customers were to deteriorate/improve,additional/reversal of allowance may be required in future periods.
(c) Net realisable value of inventories
Net realisable value of inventories is 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. Theseestimates are based on the current market condition and the historical experience of distributingand selling products of similar nature. It could change significantly as a result of competitoractions in response to severe industry cycles or other changes in market condition. Managementwill reassess the estimations at the end of each reporting period.
(d) Depreciation and amortisation
Property, plant and equipment are depreciated on a straight-line basis over the estimated usefullives, after taking into account the estimated residual value. The Group reviews annually the usefullife of an asset and its residual value, if any. Intangible assets with finite useful life are amortisedon a straight-line basis over the estimated useful lives. Both the period and method of depreciationand amortisation are reviewed annually. The depreciation and amortisation expense for futureperiods is adjusted if there are significant changes, such as operational efficiency or changes intechnologies, from previous estimates.
(e) Impairment losses of property, plant and equipment and intangible assets
Property, plant and equipment and intangible assets are reviewed periodically to assess whetherimpairment losses exist. In determining whether an impairment loss exists, the Group has toexercise judgment particularly in assessing whether the carrying value of an asset can be supportedby the net present value of future cash flows which are estimated based upon the continued use ofthe asset; and the appropriate key assumptions to be applied in preparing cash flow projectionsincluding whether these cash flow projections are discounted using an appropriate rate. Changes inthe assumptions selected by management to determine the level of impairment, including thediscount rates or the growth rate assumptions in the cash flow projections, could materially affectthe net present value used in the impairment test.
69
F-70
39 Accounting judgments and estimates (continued)
(f) Income tax
The Group is subject to income taxes in various jurisdictions. Significant judgment is required indetermining the worldwide provision for income taxes. There are many transactions andcalculations for which the ultimate tax determination is uncertain during the ordinary course ofbusiness. The Group recognises, as current liabilities, liabilities for anticipated tax issues based onestimates of whether additional taxes will eventually be due. Where the final tax outcome of thesematters is different from the amounts that were initially recorded, such differences will impact theincome tax and deferred tax provisions for the period in which such decision is made.
(g) Provision for warranties
As explained in note 31, the Group makes provision for warranties in respect of its products, takinginto account the Group’s recent claim experience and anticipated claim rates for its products. Asthe Group is continually upgrading its product designs and launching new models, it is possiblethat the recent claim experience is not indicative of future claims that it will receive in respect ofpast sales. Any increase or decrease in the provision would affect income in future years.
(h) Other provisions
The Group makes provisions for onerous contracts and outstanding litigations and claims based onproject budgets, contract terms, available knowledge and past experience. The Group recognisesprovisions to the extent that it has a present legal or constructive obligation as a result of a pastevent; it is probable that an outflow of resources will be required to settle the obligation; and thatthe amount can be reliably estimated.
40 Possible impact of amendments, new standards and interpretations issued but not yeteffective for the year ended 31 December 2013
Up to the date of issue of these consolidated financial statements, the IASB has issued a fewamendments, new standards and interpretations which are not yet effective for the year ended 31December 2013 and which have not been adopted in these consolidated financial statements. Theseinclude the following which may be relevant to the Group.
Effective foraccounting periods
beginning onor after
Amendments to IAS 32, Offsetting financial assets and financial liabilities . . . . . . . . . . . . . . . . 1 January 2014Amendments to IAS 36, Recoverable amount disclosures for non-financial assets . . . . . . . . . . . 1 January 2014Amendments to IAS 39, Novation of derivatives and continuation of hedge accounting . . . . . . . 1 January 2014IFRS 9, Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UnspecifiedIFRS 14, Regulatory deferred accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 January 2016IFRIC 21, Levies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 January 2014
The Group is in the process of making an assessment of what the impact of these amendments isexpected to be in the period of initial application. So far it has concluded that the adoption of themis unlikely to have a significant impact on the consolidated financial statements.
41 Comparative figures
As a result of the application of new IFRSs and amendments to IFRSs and to conform to currentyear’s presentation, certain comparative figures have been adjusted to provide comparativeamounts in respect of items disclosed for the first time in 2013. Further details of thesedevelopments are disclosed in note 4.
70
F-71
1
Independent auditors’ report to the Board of Directors of
Huawei Investment & Holding Co., Ltd.
We have audited the accompanying consolidated financial statements of Huawei
Investment & Holding Co., Ltd. and its subsidiaries (the “Group”) set out on pages 3 to
102, which comprise the consolidated statement of financial position as at 31 December
2014, the consolidated statements of profit or loss, profit or loss and other comprehensive
income, changes in equity and cash flows for the year then ended, and notes, comprising
a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards, and
for such internal control as management determines is necessary to enable the preparation
of consolidated financial statements that are free from material misstatement, whether due
to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. We conducted our audit in accordance with International Standards
on Auditing. Those standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on
our judgement, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
F-72
2
Independent auditors’ report to the Board of Directors of
Huawei Investment & Holding Co., Ltd. (continued)
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the
consolidated financial position of the Group as at 31 December 2014, and of its
consolidated financial performance and its consolidated cash flows for the year then
ended in accordance with International Financial Reporting Standards.
KPMG Huazhen (Special General Partnership)
Certified Public Accountants
9th Floor, China Resources Building
5001 Shennan East Road
Shenzhen 518001, China
12 March 2015
F-73
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
3
Consolidated statement of profit or loss
for the year ended 31 December 2014
Note 2014 2013
RMB’000 RMB’000
Restated
(Note 40)
Revenue 5 288,197,429 239,025,010
Cost of sales 6 (160,746,505) (141,005,320)
Gross profit 127,450,924 98,019,690
Other income 7(a) 1,724,398 2,064,542
Research and development expenses 6 (40,844,786) (31,562,698)
Selling expenses 6 (28,750,390) (24,323,873)
Administrative expenses 6 (18,717,593) (13,727,766)
Other expenses 6/7(b) (6,656,979) (1,341,457)
Operating profit before financing costs 34,205,574 29,128,438
Finance income 3,242,624 1,946,010
Finance expenses (4,697,974) (5,888,762)
Net finance expenses 9 (1,455,350) (3,942,752)
Share of associates’ results 332,172 4,073
Share of joint ventures’ results (28,997) (27,990)
Profit before taxation 33,053,399 25,161,769
Income tax 10 (5,186,985) (4,158,752)
Profit for the year 27,866,414 21,003,017
Attributable to:
Equity holders of the Company 27,850,733 20,919,275
Non-controlling interests 15,681 83,742
Profit for the year 27,866,414 21,003,017
The notes on pages 12 to 102 form part of these consolidated financial statements.
F-74
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
4
Consolidated statement of profit or loss and
other comprehensive income
for the year ended 31 December 2014
Note 2014 2013
RMB’000 RMB’000
Profit for the year 27,866,414 21,003,017 ------------------ ------------------
Other comprehensive income for the year
(after tax and reclassification
adjustments) 11
Items that will not be reclassified
subsequently to profit or loss:
Remeasurement of defined benefit
obligations (166,063) (618,227)
Items that will or may be reclassified
subsequently to profit or loss:
Net change in the fair value of
available-for-sale securities (200,040) 164,957
Exchange differences on translation of
financial statements of foreign operations 173,658 229,573
(26,382) 394,530
Other comprehensive income for the year (192,445) (223,697) ------------------ ------------------
Total comprehensive income for the year 27,673,969 20,779,320
Attributable to:
Equity holders of the Company 27,663,609 20,693,494
Non-controlling interests 10,360 85,826
Total comprehensive income for the year 27,673,969 20,779,320
The notes on pages 12 to 102 form part of these consolidated financial statements.
F-75
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
5
Consolidated statement of financial position
at 31 December 2014
Note 31 December 31 December 1 January
2014 2013 2013
RMB’000 RMB’000 RMB’000
Restated Restated
(Note 40) (Note 40)
Assets
Goodwill 13 307,325 3,342,717 3,388,790
Intangible assets 14 2,290,415 2,410,305 1,688,868
Property, plant and equipment 15 27,247,616 22,209,029 20,365,748
Long-term leasehold
prepayments 16 3,349,232 2,761,112 2,360,926
Interest in associates 17 548,401 269,736 243,079
Interest in joint ventures 18 107,249 210,869 249,531
Other investments 19 540,090 583,874 548,620
Deferred tax assets 20 14,916,223 11,576,567 9,805,326
Trade receivables 22 445,969 335,603 496,705
Other non-current assets 23 2,915,673 987,821 1,390,102
Non-current assets 52,668,193 44,687,633 40,537,695 ------------------- ------------------ ------------------
Inventories 21 46,575,920 24,928,931 22,236,525
Trade and bills receivable 22 79,579,628 78,005,307 73,171,111
Other current assets 23 24,912,638 14,525,125 15,406,821
Short-term investments 24 27,988,664 8,544,966 4,468,807
Cash and cash equivalents 25 78,047,655 73,398,640 67,180,115
Assets held for sale - - 346,609
Current assets 257,104,505 199,402,969 182,809,988 ------------------- ------------------ ------------------
Total assets 309,772,698 244,090,602 223,347,683
F-76
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
6
Consolidated statement of financial position
at 31 December 2014 (continued)
Note 31 December 31 December 1 January
2014 2013 2013
RMB’000 RMB’000 RMB’000
Restated Restated
(Note 40) (Note 40)
Equity
Paid-in capital 12,813,950 12,088,632 10,989,666
Capital surplus 41,930,527 38,550,545 33,693,113
Reserves 18,720,029 15,676,022 10,873,552
Retained earnings 26,475,000 19,891,507 19,491,850
Equity attributable to equity
holders of the Company 99,939,506 86,206,706 75,048,181
Non-controlling interests 45,571 59,410 (24,573)
Total equity 99,985,077 86,266,116 75,023,608 ------------------- ------------------ ------------------
Liabilities
Interest-bearing loans and
borrowings 27 17,576,885 19,989,460 16,077,097
Long-term employee benefits 30 9,731,333 9,608,257 9,686,076
Deferred government grants 7(a) 2,656,019 2,746,397 2,218,256
Deferred tax liabilities 20 320,488 475,744 784,072
Provisions 31 964,028 781,688 585,855
Non-current liabilities 31,248,753 33,601,546 29,351,356 ------------------- ------------------ ------------------
F-77
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
7
Consolidated statement of financial position
at 31 December 2014 (continued)
Note 31 December 31 December 1 January
2014 2013 2013
RMB’000 RMB’000 RMB’000
Restated Restated
(Note 40) (Note 40)
Liabilities (continued)
Interest-bearing loans and
borrowings 27 10,529,847 3,043,280 4,676,932
Income tax payable 5,947,493 4,034,410 1,652,881
Trade and bills payable 28 45,898,550 31,980,480 40,272,300
Other payables 29 108,818,033 80,447,144 68,721,423
Provisions 31 7,344,945 4,717,626 3,649,183
Current liabilities 178,538,868 124,222,940 118,972,719 ------------------- ------------------ ------------------
Total liabilities 209,787,621 157,824,486 148,324,075 ------------------- ------------------ ------------------
Total equity and liabilities 309,772,698 244,090,602 223,347,683
Approved and authorised for issue by the board of directors on 12 March 2015.
)
) Directors
Sun Yafang Guo Ping )
The notes on pages 12 to 102 form part of these consolidated financial statements.
F-78
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F-80
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
10
Consolidated statement of cash flows
for the year ended 31 December 2014
2014 2013
RMB’000 RMB’000
Cash flows from operating activities
Cash receipts from customers 367,826,797 293,316,662
Cash paid to suppliers and employees (321,201,150) (269,597,954)
Government grants received 943,060 992,750
Pledged deposits (725,046) 64,862
Cash generated from operating activities 46,843,661 24,776,320
Income tax paid (5,088,297) (2,222,743)
Net cash from operating activities 41,755,364 22,553,577 ------------------ ------------------ Cash flows from investing activities
Proceeds from sale of property, plant and
equipment 93,420 1,049,070
Proceeds from sale of intangible assets - 25,930
Purchase and sale of wealth management
products (18,867,619) (2,790,695)
Interest and dividends received 7,226 116,746
Proceeds from disposal of associates - 15,000
Proceeds from sale of available-for-sale
equity securities stated at fair value 149,630 40,644
Proceeds from sale of held-for-trading
financial instruments 145,742 13,029
Repayment from loans receivable 3,237 58,354
Acquisition of available-for-sale
equity securities stated at cost (34,303) -
Acquisition of held-for-trading
financial instruments (170,239) -
Acquisition of loans receivable (3,642) (37,750)
Acquisition of property, plant and equipment (6,109,441) (5,256,996)
Acquisition of intangible assets and long-term
leasehold prepayments (1,054,038) (1,077,207)
Investment in an associate - (25,000)
Acquisition of subsidiaries, net of cash acquired (369,313) (168,429)
Net cash used in investing activities (26,209,340) (8,037,304) ------------------ ------------------
F-81
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
11
Consolidated statement of cash flows
for the year ended 31 December 2014 (continued)
Note 2014 2013
RMB’000 RMB’000
Cash flows from financing activities
Proceeds from capital injected 4,105,300 5,956,398
Payment for acquisition of non-controlling
interests - (6,475)
Proceeds from issuance of corporate bond 1,599,995 -
Proceeds from borrowings 21,770,946 31,913,325
Repayment of borrowings (19,526,450) (28,850,697)
Dividends paid to non-controlling interests (1,431) (812)
Dividends paid to equity holders of the
Company (17,335,621) (15,176,002)
Interest paid (1,018,852) (961,187)
Net cash used in financing activities (10,406,113) (7,125,450) ------------------ ------------------
Net increase in cash and cash equivalents 5,139,911 7,390,823
Cash and cash equivalents at 1 January 25 73,398,640 67,180,115
Effect of foreign exchange rate changes (490,896) (1,172,298)
Cash and cash equivalents at 31 December 25 78,047,655 73,398,640
The notes on pages 12 to 102 form part of these consolidated financial statements.
F-82
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
12
Notes to the consolidated financial statements
for the year ended 31 December 2014
1 Reporting entity
Huawei Investment & Holding Co., Ltd. (the “Company”) is a limited liability company
established in Shenzhen in the People’s Republic of China (the “PRC”). The Company’s
registered office is at Huawei Industrial Base, Bantian Longgang, Shenzhen, PRC.
The Company and its subsidiaries, together referred to as the Group, principally provide
end to end ICT solutions, research, design, manufacture and market telecom network
equipment, IT products and solutions, and smart devices for telecom carriers, enterprises
and consumers. The principal activities and other particulars of the Company’s major
subsidiaries are set out in note 37(b) to the consolidated financial statements.
2 Statement of compliance
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRSs”), which collective term includes all
applicable individual IFRSs, International Accounting Standards (“IASs”) and
Interpretations issued by the International Accounting Standards Board (“IASB”).
The IASB has issued certain new and revised IFRSs that are first effective or available
for early adoption for the current accounting period of the Group. Note 4 provides
information on any changes in accounting policies resulting from initial application of
these developments to the extent that they are relevant to the Group for the current and
prior accounting periods reflected in these consolidated financial statements.
The Company has also prepared a separate set of consolidated financial statements which
comply with the generally accepted accounting principles in the PRC.
3 Significant accounting policies
(a) Basis of preparation of the consolidated financial statements
The consolidated financial statements for the year ended 31 December 2014 comprise the
Company and its subsidiaries and the Group’s interest in associates and joint ventures.
F-83
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
13
3 Significant accounting policies (continued)
(a) Basis of preparation of the consolidated financial statements (continued)
The measurement basis used in the preparation of the consolidated financial statements is
the historical cost basis except for financial instruments classified as available-for-sale or
held-for-trading, which are stated at their fair value as explained in the accounting
policies set out in note 3(f).
Non-current assets held for sale are stated at the lower of carrying amount and fair value
less costs to sell (see note 3(v)).
The preparation of consolidated financial statements in conformity with IFRSs requires
management to make judgments, estimates and assumptions that affect the application of
policies and reported amounts of assets, liabilities, income and expenses. The estimates
and associated assumptions are based on historical experience and various other factors
that are believed to be reasonable under the circumstances, the results of which form the
basis of making the judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised 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.
Judgments made by management in the application of IFRSs that have significant effect
on the consolidated financial statements and major sources of estimation uncertainty are
discussed in note 38.
(b) Functional and presentation currency
These consolidated financial statements are presented in Renminbi (“RMB”), which is the
Company’s functional currency. All amounts have been rounded to the nearest thousand
unless otherwise specified.
(c) Business combinations and goodwill
The Group accounts for business combinations using the acquisition method when
control is transferred to the Group (see note 3(d)). The consideration transferred in the
acquisition is generally measured at fair value, as are the identifiable net assets acquired.
Transaction costs are expensed as incurred.
The consideration transferred does not include amounts related to the settlement of pre-
existing relationships. Such amounts generally are recognised in profit or loss.
Any contingent consideration payable is measured at fair value at the acquisition date. If
the contingent consideration is classified as equity, then it is not remeasured and
settlement is accounted for within equity. Otherwise, subsequent changes in the fair
value of the contingent consideration are recognised in profit or loss.
F-84
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
14
3 Significant accounting policies (continued)
(c) Business combinations and goodwill (continued)
Goodwill arising on a business combination represents the excess of:
(i) the aggregate of the fair value of the consideration transferred, the recognised
amount of any non-controlling interest in the acquiree and the fair value of the
Group’s previously held equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets acquired and liabilities
assumed as at the acquisition date.
When (ii) is greater than (i), then this excess is recognised immediately in profit or loss as
a gain on a bargain purchase.
Goodwill is stated at cost less accumulated impairment losses (see note 3(m)). Goodwill
is allocated to each cash-generating unit, or groups of cash generating units, that is
expected to benefit from the synergies of the combination and is tested annually for
impairment (see note 3(m)).
(d) Subsidiaries and non-controlling interests
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is
exposed, or has rights, to variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity. When assessing whether
the Group has power, only substantive rights (held by the Group and other parties) are
considered.
An investment in a subsidiary is consolidated into the consolidated financial statements
from the date that control commences until the date that control ceases. Intra-group
balances, transactions and cash flows and any unrealised profits arising from intra-group
transactions are eliminated in full in preparing the consolidated financial statements.
Unrealised losses resulting from intra-group transactions are eliminated in the same way
as unrealised gains but only to the extent that there is no evidence of impairment.
Non-controlling interests represent the equity in a subsidiary not attributable directly or
indirectly to the Company, and in respect of which the Group has not agreed any
additional terms with the holders of those interests which would result in the Group as a
whole having a contractual obligation in respect of those interests that meets the
definition of a financial liability. For each business combination, the Group can elect to
measure any non-controlling interests either at fair value or at the non-controlling
interests’ proportionate share of the subsidiary’s net identifiable assets.
F-85
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
15
3 Significant accounting policies (continued)
(d) Subsidiaries and non-controlling interests (continued)
Non-controlling interests are presented in the consolidated statement of financial position
within equity, separately from equity attributable to the equity holders of the Company.
Non-controlling interests in the results of the Group are presented on the face of the
consolidated statement of profit or loss and the consolidated statement of profit or loss
and other comprehensive income as an allocation of the total profit or loss and total
comprehensive income for the year between non-controlling interests and the equity
holders of the Company.
Changes in the Group’s interests in a subsidiary that do not result in a loss of control are
accounted for as equity transactions, whereby adjustments are made to the amounts of
controlling and non-controlling interests within consolidated equity to reflect the change
in relative interests, but no adjustments are made to goodwill and no gain or loss is
recognised.
When the Group loses control of a subsidiary, it is accounted for as a disposal of the
entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or
loss. Any interest retained in that former subsidiary at the date when control is lost is
recognised at fair value and this amount is regarded as the fair value on initial recognition
of a financial asset (see note 3(f)) or, when appropriate, the cost on initial recognition of
an investment in an associate or joint venture (see note 3(e)).
(e) Associates and joint ventures
An associate is an entity in which the Group has significant influence, but not control or
joint control, over its management, including participation in the financial and operating
policy decisions.
A joint venture is an arrangement whereby the Group and other parties contractually
agree to share control of the arrangement, and have rights to the net assets of the
arrangement.
An investment in an associate or a joint venture is accounted for in the consolidated
financial statements using the equity method. Under the equity method, the investment is
initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-
date fair values of the investee’s identifiable net assets over the cost of the investment (if
any). Thereafter, the investment is adjusted for the post acquisition change in the Group’s
share of the investee’s net assets and any impairment loss relating to the investment (see
note 3(m)). Any acquisition-date excess over cost, the Group’s share of the post-
acquisition, post-tax results of the investees and any impairment losses for the year are
recognised in the consolidated statement of profit or loss, whereas the Group’s share of
the post-acquisition post-tax items of the investees’ other comprehensive income is
recognised in the consolidated statement of profit or loss and other comprehensive
income.
F-86
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
16
3 Significant accounting policies (continued)
(e) Associates and joint ventures (continued)
When the Group’s share of losses equals or exceeds its interest in the associate or the
joint venture, the Group’s interest is reduced to nil and recognition of further losses is
discontinued except to the extent that the Group has incurred legal or constructive
obligations or made payments on behalf of the investee. For this purpose, the Group’s
interest is the carrying amount of the investment under the equity method together with
the Group’s long-term interests that in substance form part of the Group’s net investment
in the associate or the joint venture.
Unrealised profits and losses resulting from transactions between the Group and its
associates and joint ventures are eliminated to the extent of the Group’s interest in the
investee, except where unrealised losses provide evidence of an impairment of the asset
transferred, in which case they are recognised immediately in profit or loss.
If an investment in an associate becomes an investment in a joint venture or vice versa,
retained interest is not remeasured. Instead, the investment continues to be accounted for
under the equity method.
In other cases, when the Group ceases to have significant influence over an associate or
joint control over a joint venture, it is accounted for as a disposal of the entire interest in
that investee, with a resulting gain or loss being recognised in profit or loss. Any interest
retained in that former investee at the date when significant influence or joint control is
lost is recognised at fair value and this amount is regarded as the fair value on initial
recognition of a financial asset (see note 3(f)).
(f) Financial instruments
Financial assets of the Group comprise financial assets at fair value through profit or loss,
loans and receivables and available-for-sale financial assets.
Financial liabilities of the Group comprise interest-bearing loans and borrowings, and
other financial liabilities.
(i) Recognition and derecognition
Financial assets and financial liabilities are recognised in the consolidated statement of
financial position when the Group becomes a party to the contractual provisions of the
instrument.
All financial assets are initially recognised at fair value, which is usually the transaction
price.
F-87
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
17
3 Significant accounting policies (continued)
(f) Financial instruments (continued)
(i) Recognition and derecognition (continued)
The Group derecognises a financial asset when the contractual rights to the cash flows
from the asset expire, or it transfers the rights to receive the contractual cash flows in a
transaction in which substantially all of the risks and rewards of ownership of the
financial asset are transferred, or it neither transfers nor retains substantially all of the
risks and rewards of ownership and does not retain control over the transferred asset. Any
interest in such derecognised financial assets that is created or retained by the Group is
recognised as a separate asset or liability. The Group derecognises a financial liability
when its contractual obligations are discharged, cancelled, or expire.
Financial assets and financial liabilities are offset and the net amount presented in the
consolidated statement of financial position when, and only when, the Group currently
has a legally enforceable right to set off the recognised amounts and intends either to
settle them on a net basis or to realise the asset and settle the liability simultaneously.
(ii) Measurement
Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified
as held-for-trading or is designated as such on initial recognition. Directly
attributable transaction costs are recognised in profit or loss as incurred. At the end
of each reporting period the fair value is remeasured, with any resultant gain or loss
being recognised in profit or loss. The net gain or loss recognised in profit or loss
does not include any dividends or interest earned on these investments as these are
recognised in accordance with the policies set out in note 3(u).
Loans and receivables
Loans and receivables are initially recognised at fair value and thereafter stated at
amortised cost less allowance for impairment of doubtful debts (see note 3(m)),
except where the receivables are interest-free loans made to related parties without
any fixed repayment terms or the effect of discounting would be immaterial. In such
cases, the receivables are stated at cost less allowance for impairment of doubtful
debts.
The Group purchases wealth management products from commercial banks with
maturity less than one year. Wealth management products with guaranteed
principals and earnings are classified as loans and receivables; while those with
principals and earnings not guaranteed are classified as available-for-sale financial
assets.
F-88
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
18
3 Significant accounting policies (continued)
(f) Financial instruments (continued)
(ii) Measurement (continued)
Loans and receivables (continued)
From time to time, the Group transfers its trade receivables to banks or financial
institutions; the bank or the financial institutions fully bear the collection risk
without the right to receive payments from the Group in the event a loss occurs due
to the non-collectibility of the receivables transferred. The Group’s customers make
payments of the receivables transferred directly to the bank or the financial
institutions. In such case, trade receivables transferred are derecognised from the
consolidated statement of financial position. The excess of the carrying amount of
trade receivables over cash received from the banks or financial institutions is
included in “other expenses” in the consolidated statement of profit or loss.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are not
classified in any of the above categories of financial assets. Available-for-sale
financial assets are recognised initially at fair value plus any directly attributable
transaction costs. At the end of each reporting period the fair value is remeasured,
with any resultant gain or loss being recognised in other comprehensive income and
accumulated separately in equity in the fair value reserve. As an exception to this,
available-for-sale financial assets that do not have a quoted price in an active market
for an identical instrument and whose fair value cannot otherwise be reliably
measured are recognised in the consolidated statement of financial position at cost
less impairment losses (see note 3(m)). Dividend income is recognised in profit or
loss in accordance with the policy set out in note 3(u) and, where these investments
are interest-bearing, interest calculated using the effective interest method is
recognised in profit or loss in accordance with the policy set out in note 3(u).
When these assets are derecognised or impaired (see note 3(m)), the cumulative
gain or loss is reclassified from equity to profit or loss.
Interest-bearing loans and borrowings
Interest-bearing loans and borrowings are recognised initially at fair value less
attributable transaction costs. Subsequent to initial recognition, interest-bearing
loans and borrowings are stated at amortised cost with any difference between the
amount initially recognised and redemption value being recognised in profit or loss
over the period of the loans and borrowings, together with any interest and fees
payable, using the effective interest method.
F-89
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
19
3 Significant accounting policies (continued)
(f) Financial instruments (continued)
(ii) Measurement (continued)
Other financial liabilities
Trade and other payables are initially recognised at fair value and subsequently
stated at amortised cost unless the effect of discounting would be immaterial, in
which case they are stated at cost.
(g) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, demand deposits with
banks and other financial institutions, and short-term, highly liquid investments that are
readily convertible into known amounts of cash and which are subject to an insignificant
risk of changes in value, having been within three months of maturity at acquisition. Bank
overdrafts that are repayable on demand and form an integral part of the Group’s cash
management are also included as a component of cash and cash equivalents for the
purpose of the consolidated statement of cash flows.
(h) Investment property
Investment properties are land and / or buildings which are owned or held under a
leasehold interest (see note 3(l)) to earn rental income and / or for capital appreciation.
Investment properties are stated at cost less accumulated depreciation (see note 3(i)(iii))
and impairment losses (see note 3(m)). Depreciation is calculated to write off the cost of
items of investment property, less their estimated residual value, if any, using the straight
line method over their estimated useful lives. Rental income from investment properties
is accounted for as described in note 3(r)(ii).
(i) Other property, plant and equipment
(i) Recognition and measurement
Items of property, plant and equipment are stated at cost less accumulated depreciation
and impairment losses (see note 3(m)). Cost includes expenditure that is directly
attributable to the acquisition of the assets. The cost of self-constructed items of
property, plant and equipment includes the cost of materials, direct labour, the initial
estimate, where relevant, of the costs of dismantling and removing the items and restoring
the site on which they are located, and an appropriate proportion of production overheads
and borrowing costs (see note 3(u)).
Construction in progress is transferred to other property, plant and equipment when it is
ready for its intended use.
F-90
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
20
3 Significant accounting policies (continued)
(i) Other property, plant and equipment (continued)
(i) Recognition and measurement (continued)
Gains or losses arising from the retirement or disposal of an item of property, plant and
equipment are determined as the difference between the net disposal proceeds and the
carrying amount of the item and are recognised in profit or loss on the date of retirement
or disposal.
(ii) Subsequent costs
The cost of replacing part of an item of property, plant and equipment is recognised in the
carrying amount of the item if it is probable that the future economic benefits embodied
within the part will flow to the Group and its cost can be measured reliably. The carrying
amount of the replaced component is derecognised. The costs of the day-to-day servicing
of property, plant and equipment are recognised in profit or loss as incurred.
(iii) Depreciation
Depreciation is calculated to write off the cost of items of property, plant and equipment,
less their estimated residual value, if any, using the straight line method over their
estimated useful lives as follows:
Freehold land and construction in progress that are not depreciated
Buildings (note 38(d)) 30 years
Machinery, electronic equipment and other equipment 3 to 10 years
Motor vehicles 5 years
Decoration and leasehold improvements 2 to 5 years
Where parts of an item of property, plant and equipment have different useful lives, the
cost or valuation of the item is allocated on a reasonable basis between the parts and each
part is depreciated separately. Both the useful life of an item of property, plant and
equipment and its residual value, if any, are reviewed annually.
(j) Long-term leasehold prepayments
Long-term leasehold prepayments represent land premium, resettlement fees and related
expenses in obtaining the relevant land use rights. Long-term leasehold prepayments are
stated at cost, less accumulated amortisation and impairment losses (see note 3(m)).
Amortisation is charged to the consolidated statement of profit or loss on a straight-line
basis over the period of the land use rights which is generally not exceeding 50 years.
F-91
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
21
3 Significant accounting policies (continued)
(k) Intangible assets
(i) Research and development
Research and development costs comprise all costs that are directly attributable to
research and development activities or that can be allocated on a reasonable basis to such
activities. Because of the nature of the Group’s research and development activities, the
criteria for the recognition of such costs as assets are generally not met until late in the
development stage of the project when the remaining development costs are immaterial.
Hence both research costs and development costs are generally recognised as expenses in
profit or loss in the period in which they are incurred.
(ii) Other intangible assets
Other intangible assets that are acquired by the Group are stated at cost less accumulated
amortisation (where the estimated useful life is finite) and impairment losses (see note
3(m)).
(iii) Amortisation
Amortisation of intangible assets with finite useful lives is charged to profit or loss on a
straight-line basis over the assets’ estimated useful lives. The following intangible assets
with finite useful lives are amortised from the date they are available for use and their
estimated useful lives are as follows:
Software 3 years
Patents 3 to 22 years
Trademark 10 years
Both the period and method of amortisation are reviewed annually.
Intangible assets are not amortised while their useful lives are assessed to be indefinite.
Any conclusion that the useful life of an intangible asset is indefinite is reviewed annually
to determine whether events and circumstances continue to support the indefinite useful
life assessment for that asset. If they do not, the change in the useful life assessment from
indefinite to finite is accounted for prospectively from the date of change and in
accordance with the policy for amortisation of intangible assets with finite lives as set out
above.
F-92
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
22
3 Significant accounting policies (continued)
(l) Leased assets
An arrangement, comprising a transaction or a series of transactions, is or contains a lease
if the Group determines that the arrangement conveys a right to use a specific asset or
assets for an agreed period of time in return for a payment or a series of payments. Such
a determination is made based on an evaluation of the substance of the arrangement and
is regardless of whether the arrangement takes the legal form of a lease.
(i) Classification of assets leased to the Group
Assets that are held by the Group under leases which transfer to the Group substantially
all the risks and rewards of ownership are classified as being held under finance leases.
Leases which do not transfer substantially all the risks and rewards of ownership to the
Group are classified as operating leases.
(ii) Operating lease charges
Where the Group has the use of assets held under operating leases, payments made under
the leases are charged to profit or loss in equal instalments over the accounting periods
covered by the lease term, except where an alternative basis is more representative of the
pattern of benefits to be derived from the leased asset. Lease incentives received are
recognised in profit or loss as an integral part of the aggregate net lease payments made.
Contingent rentals are charged to profit or loss in the accounting period in which they are
incurred.
(m) Impairment of assets
(i) Impairment of investments in debt and equity securities and other receivables
Investments in debt and equity securities and other current and non-current receivables
that are stated at cost or amortised cost or are classified as available-for-sale securities are
reviewed at the end of each reporting period to determine whether there is objective
evidence of impairment. Objective evidence of impairment includes observable data that
comes to the attention of the Group about one or more of the following loss events:
significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal
payments;
it becoming probable that the debtor will enter bankruptcy or other financial
reorganisation;
significant changes in the technological, market, economic or legal environment that
have an adverse effect on the debtor; and
a significant or prolonged decline in the fair value of an investment in an equity
instrument below its cost.
F-93
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
23
3 Significant accounting policies (continued)
(m) Impairment of assets (continued)
(i) Impairment of investments in debt and equity securities and other receivables (continued)
If any such evidence exists, any impairment loss is determined and recognised as follows:
For investments in associates and joint ventures accounted for under the equity
method (see note 3(e)), the impairment loss is measured by comparing the
recoverable amount of the investment with its carrying amount in accordance with
note 3(m)(ii). The impairment loss is reversed if there has been a favourable change
in the estimates used to determine the recoverable amount in accordance with note
3(m)(ii).
For unquoted equity securities carried at cost, the impairment loss is measured as
the difference between the carrying amount of the financial asset and the estimated
future cash flows, discounted at the current market rate of return for a similar
financial asset where the effect of discounting is material. Impairment losses for
equity securities carried at cost are not reversed.
For trade and other current receivables and other financial assets carried at
amortised cost, the impairment loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future cash flows,
discounted at the financial assets’ original effective interest rate (i.e. the effective
interest rate computed at initial recognition of these assets), where the effect of
discounting is material. This assessment is made collectively where these financial
assets share similar risk characteristics, such as similar past due status, and have not
been individually assessed as impaired. Future cash flows for financial assets which
are assessed for impairment collectively are based on historical loss experience for
assets with credit risk characteristics similar to the collective group.
If in a subsequent period the amount of an impairment loss decreases and the
decrease can be linked objectively to an event occurring after the impairment loss
was recognised, the impairment loss is reversed through profit or loss. A reversal of
an impairment loss shall not result in the asset’s carrying amount exceeding that
which would have been determined had no impairment loss been recognised in prior
years.
F-94
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
24
3 Significant accounting policies (continued)
(m) Impairment of assets (continued)
(i) Impairment of investments in debt and equity securities and other receivables (continued)
For available-for-sale securities, the cumulative loss that has been recognised in the
fair value reserve is reclassified to profit or loss. The amount of the cumulative loss
that is recognised in profit or loss is the difference between the acquisition cost (net
of any principal repayment and amortisation) and current fair value, less any
impairment loss on that asset previously recognised in profit or loss.
Impairment losses recognised in profit or loss in respect of available-for-sale equity
securities are not reversed through profit or loss. Any subsequent increase in the fair
value of such assets is recognised in other comprehensive income.
Impairment losses in respect of available-for-sale debt securities are reversed if the
subsequent increase in fair value can be objectively related to an event occurring
after the impairment loss was recognised. Reversals of impairment losses in such
circumstances are recognised in profit or loss.
Impairment losses are written off against the corresponding assets directly, except for
impairment losses recognised in respect of trade and bills receivable, whose recovery is
considered doubtful but not remote. In this case, the impairment losses for doubtful debts
are recorded using an allowance account. When the Group is satisfied that recovery is
remote, the amount considered irrecoverable is written off against trade and bills
receivable directly and any amounts held in the allowance account relating to that debt
are reversed. Subsequent recoveries of amounts previously charged to the allowance
account are reversed against the allowance account. Other changes in the allowance
account and subsequent recoveries of amounts previously written off directly are
recognised in profit or loss.
(ii) Impairment of other assets
Internal and external sources of information are reviewed at the end of each reporting
period to identify indications that the following assets may be impaired or, except in the
case of goodwill, an impairment loss previously recognised no longer exists or may have
decreased:
investment property and other property, plant and equipment;
long-term leasehold prepayments;
other long-term deferred assets;
intangible assets; and
goodwill
F-95
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
25
3 Significant accounting policies (continued)
(m) Impairment of assets (continued)
(ii) Impairment of other assets (continued)
If any such indication exists, the asset’s recoverable amount is estimated. In addition, for
goodwill, intangible assets that are not yet available for use and intangible assets that
have indefinite useful lives, the recoverable amount is estimated annually whether or not
there is any indication of impairment.
Calculation of recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of
disposal 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. Where an asset does not generate cash inflows largely independent of those
from other assets, the recoverable amount is determined for the smallest group of
assets that generates cash inflows independently (i.e. a cash-generating unit).
Recognition of impairment losses
An impairment loss is recognised in profit or loss if the carrying amount of an asset,
or the cash-generating unit to which it belongs, exceeds its recoverable amount.
Impairment losses recognised in respect of cash-generating units are allocated first
to reduce the carrying amount of any goodwill allocated to the cash-generating unit
(or group of units) and then, to reduce the carrying amount of the other assets in the
unit (or group of units) on a pro rata basis, except that the carrying value of an asset
will not be reduced below its individual fair value less costs of disposal (if
measureable) or value in use (if determinable).
Reversals of impairment losses
In respect of assets other than goodwill, an impairment loss is reversed if there has
been a favourable change in the estimates used to determine the recoverable
amount. An impairment loss in respect of goodwill is not reversed.
A reversal of an impairment loss is limited to the asset’s carrying amount that
would have been determined had no impairment loss been recognised in prior years.
Reversals of impairment losses are credited to profit or loss in the year in which the
reversals are recognised.
F-96
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
26
3 Significant accounting policies (continued)
(n) Inventories
Inventories are carried at the lower of cost and net realisable value.
Cost is calculated using the standard cost method with periodical adjustments of cost
variance to arrive at the actual cost, which approximates to a weighted average cost
formula. The cost of inventories includes expenditures incurred in acquiring the
inventories and bringing them to their present location and condition. In the case of
manufactured inventories and work in progress, cost includes an appropriate share of
overheads based on normal operating capacity.
Net realisable value is 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.
When inventories are sold, the carrying amount of those inventories is recognised as an
expense in the period in which the related revenue is recognised. The amount of any
write-down of inventories to net realisable value and all losses of inventories are
recognised as an expense in the period the write-down or loss occurs. The amount of any
reversal of any write-down of inventories is recognised as a reduction in the amount of
inventories recognised as an expense in the period in which the reversal occurs.
(o) Employee benefits
(i) Short term employee benefits, contributions to defined contribution retirement plans and
other long-term employee benefits
Salaries, profit-sharing and bonus payments, paid annual leave and contributions to
defined contribution retirement plans are accrued in the year in which the associated
services are rendered by employees. Where payment or settlement is deferred and the
effect would be material, these amounts are stated at their present values.
(ii) Defined benefit obligations
The Group’s obligation in respect of defined benefit plans is calculated separately for
each plan by estimating the amount of future benefit that employees have earned in return
for their service in the current and prior periods; that benefit is discounted to determine
the present value. The calculation is performed by management using the projected unit
credit method.
F-97
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
27
3 Significant accounting policies (continued)
(o) Employee benefits (continued)
(ii) Defined benefit obligations (continued)
Service cost and interest cost on the defined benefit obligations are recognised in profit or
loss. Current service cost is measured as the increase in the present value of the defined
benefit obligations resulting from employee service in the current period. When the
benefits of a plan are changed, or when a plan is curtailed, the portion of the changed
benefit related to past service by employees, or the gain or loss on curtailment, is
recognised as an expense in profit or loss at the earlier of when the plan amendment or
curtailment occurs and when related restructuring costs or termination benefits are
recognised. Interest cost on defined benefit obligations for the period is determined by
applying the discount rate used to measure the defined benefit obligation at the beginning
of the reporting period to the defined benefit obligations. The discount rate is the yield at
the end of the reporting period on high quality corporate bonds that have maturity dates
approximating the terms of the Group’s obligations.
Remeasurements arising from defined benefit plans are recognised immediately in other
comprehensive income and shall not be reclassified to profit or loss in a subsequent
period. However, the remeasurement amounts recognised in other comprehensive income
may be transferred within equity. Remeasurements include actuarial gains and losses.
(p) Income tax
Income tax for the year comprises current tax and movements in deferred tax assets and
liabilities. Current tax and movements in deferred tax assets and liabilities are recognised
in profit or loss except to the extent that they relate to items recognised in other
comprehensive income or directly in equity, in which case the relevant amounts of tax are
recognised in other comprehensive income or directly in equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates
enacted or substantively enacted at the end of the reporting period, and any adjustment to
tax payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences
respectively, being the differences between the carrying amounts of assets and liabilities
for financial reporting purposes and their tax bases. Deferred tax assets also arise from
unused tax losses and unused tax credits.
F-98
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
28
3 Significant accounting policies (continued)
(p) Income tax (continued)
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax
assets to the extent that it is probable that future taxable profits will be available against
which the asset can be utilised, are recognised. Future taxable profits that may support
the recognition of deferred tax assets arising from deductible temporary differences
include those that will arise from the reversal of existing taxable temporary differences,
provided those differences relate to the same taxation authority and the same taxable
entity, and are expected to reverse either in the same period as the expected reversal of
the deductible temporary difference or in periods into which a tax loss arising from the
deferred tax asset can be carried back or forward. The same criteria are adopted when
determining whether existing taxable temporary differences support the recognition of
deferred tax assets arising from unused tax losses and credits, that is, those differences are
taken into account if they relate to the same taxation authority and the same taxable
entity, and are expected to reverse in a period, or periods, in which the tax loss or credit
can be utilised.
The limited exceptions to recognition of deferred tax assets and liabilities are those
temporary differences arising from the initial recognition of goodwill, the initial
recognition of assets or liabilities that affect neither accounting nor taxable profit
(provided they are not part of a business combination), and temporary differences relating
to investments in subsidiaries to the extent that, in the case of taxable differences, the
Group controls the timing of the reversal and it is probable that the differences will not
reverse in the foreseeable future, or in the case of deductible differences, unless it is
probable that they will reverse in the future.
The amount of deferred tax recognised is measured based on the expected manner of
realisation or settlement of the carrying amount of the assets and liabilities, using tax
rates enacted or substantively enacted at the end of the reporting period. Deferred tax
assets and liabilities are not discounted.
The carrying amount of a deferred tax asset is reviewed at the end of each reporting
period and is reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow the related tax benefit to be utilised. Any such reduction
is reversed to the extent that it becomes probable that sufficient taxable profits will be
available.
F-99
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
29
3 Significant accounting policies (continued)
(p) Income tax (continued)
Current tax balances and deferred tax balances, and movements therein, are presented
separately from each other and are not offset. Current tax assets are offset against current
tax liabilities, and deferred tax assets against deferred tax liabilities, if the Group has the
legally enforceable right to set off current tax assets against current tax liabilities and the
following additional conditions are met:
in the case of current tax assets and liabilities, the Group intends either to settle on a
net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied
by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant
amounts of deferred tax liabilities or assets are expected to be settled or
recovered, intend to realise the current tax assets and settle the current tax
liabilities on a net basis or realise and settle simultaneously.
(q) Provisions and contingent liabilities
(i) Provision for warranties
The Group provides warranty on its products for a period typically covering 12 to 24
months. The Group estimates the costs that may be incurred under its warranty
obligations and records a liability in the amount of such costs when revenue is
recognised. Warranty costs generally includes parts, labour costs and service centre
support. Factors that affect the Group’s warranty liability include the number of installed
units, historical and anticipated rates of warranty claims. The Group periodically
reassesses its warranty liabilities and adjusts the amounts as necessary.
(ii) Provision for onerous contracts
A provision for onerous contracts is recognised when the expected benefits to be derived
by the Group from a contract are lower than the unavoidable cost of meeting its
obligations under the contract. The provision is measured at the present value of the
lower of the expected cost of terminating the contract and the expected net cost of
continuing with the contract. Before a provision is established, the Group recognises any
impairment loss on the assets associated with that contract.
F-100
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
30
3 Significant accounting policies (continued)
(q) Provisions and contingent liabilities (continued)
(iii) Other provisions and contingent liabilities
Provisions are recognised for other liabilities of uncertain timing or amount when the
Group has a legal or constructive obligation arising as a result of a past event, it is
probable that an outflow of economic benefits will be required to settle the obligation and
a reliable estimate can be made. Where the time value of money is material, provisions
are stated at the present value of the expenditure expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the
amount cannot be estimated reliably, the obligation is disclosed as a contingent liability,
unless the probability of outflow of economic benefits is remote. Possible obligations,
whose existence will only be confirmed by the occurrence or non-occurrence of one or
more future events are also disclosed as contingent liabilities unless the probability of
outflow of economic benefits is remote.
(r) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable.
Provided it is probable that the economic benefits will flow to the Group and the revenue
and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss
as follows:
(i) Sale of goods and provision of services
Revenue from sale of goods is recognised when the significant risks and rewards of
ownership of goods have been transferred to the buyer. Revenue from provision of
services is recognised at the time when the services are provided. No revenue is
recognised if there are significant uncertainties regarding the recovery of the
consideration due, associated costs or the possible return of goods. Revenue excludes
value added tax or other sales taxes and is after deduction of any trade discounts.
F-101
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
31
3 Significant accounting policies (continued)
(r) Revenue recognition (continued)
(ii) Rental income from operating leases
Rental income receivable under operating leases is recognised in profit or loss in equal
instalments over the periods covered by the lease term, except where an alternative basis
is more representative of the pattern of benefits to be derived from the use of the leased
asset. Lease incentives granted are recognised in profit or loss as an integral part of the
aggregate net lease payments receivable. Contingent rentals are recognised as income in
the accounting period in which they are earned.
(s) Government grants
Government grants are recognised in the consolidated statement of financial position only
when there is reasonable assurance that they will be received and that the Group will
comply with the conditions attaching to them. Grants that compensate the Group for
expenses incurred are recognised as other income in profit or loss on a systematic basis in
the same periods in which the expenses are incurred. Grants that compensate the Group
for the cost of an asset are recognised as deferred income and consequently are
effectively recognised in profit or loss on a systematic basis over the useful life of the
asset.
(t) Translation of foreign currencies
(i) Foreign currency transactions
Foreign currency transactions during the year are translated to the respective functional
currencies of group entities at the foreign exchange rates ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies are translated to the
functional currency at the foreign exchange rates ruling at the end of the reporting period.
Exchange gains and losses are recognised in profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a
foreign currency are translated using the foreign exchange rates ruling at the transaction
dates. Non-monetary assets and liabilities denominated in foreign currencies that are
stated at fair value are translated using the foreign exchange rates ruling at the dates the
fair value was measured.
F-102
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
32
3 Significant accounting policies (continued)
(t) Translation of foreign currencies (continued)
(ii) Foreign operations
The results of foreign operations, except for foreign operations in hyperinflationary
economies, are translated into RMB at the exchange rates approximating the foreign
exchange rates ruling at the dates of the transactions. Statement of financial position
items are translated into RMB at the closing foreign exchange rates at the end of the
reporting period. The resulting exchange differences are recognised in other
comprehensive income and accumulated separately in equity in the exchange reserve. If
the operation is a non-wholly-owned subsidiary, then the relevant proportionate share of
the exchange difference is allocated to the non-controlling interests.
The results of foreign operations in hyperinflationary economies are translated to RMB at
the exchange rates ruling at the end of the reporting period. Prior to translating the
financial statements of foreign operations in hyperinflationary economies, their financial
statements for the current year are restated to account for changes in the general
purchasing power of the local currencies. The restatement is based on relevant price
indices at the end of the reporting period.
When a foreign operation is disposed of in its entirety or partially such that control,
significant influence or joint control is lost, the cumulative amount in the exchange
reserve related to that foreign operation is reclassified to profit or loss as part of the gain
or loss on disposal.
When the Group disposes of only part of its interest in a subsidiary that includes a foreign
operation while retaining control, the relevant proportion of the cumulative amount is
reattributed to non-controlling interests. When the Group disposes of only part of its
investment in an associate or a joint venture that includes a foreign operation while
retaining significant influence or joint control, the relevant proportion of the cumulative
amount is reclassified to profit or loss.
(u) Finance income and expenses
Finance income comprises dividend and interest income on funds invested (including
available-for-sale financial assets), gains on the disposal of available-for-sale and held-
for-trading financial assets, and changes in the fair value of held-for-trading financial
assets. Interest income is recognised as it accrues using the effective interest method.
Dividend income from unlisted investments is recognised when the equity holder’s right
to receive payment is established; dividend income from listed investments is recognised
when the share price of the investment goes ex-dividend.
F-103
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
33
3 Significant accounting policies (continued)
(u) Finance income and expenses (continued)
Finance expenses comprise interest expense on borrowings, unwinding of the discount on
provisions and impairment losses recognised on available-for-sale financial assets.
Borrowing costs that are directly attributable to the acquisition, construction or
production of an asset which necessarily takes a substantial period of time to get ready for
its intended use or sale are capitalised as part of the cost of that asset. Other borrowing
costs are expensed in the period in which they are incurred.
The capitalisation of borrowing costs as part of the cost of a qualifying asset commences
when expenditure for the asset is being incurred, borrowing costs are being incurred and
activities that are necessary to prepare the asset for its intended use or sale are in
progress. Capitalisation of borrowing costs is suspended or ceases when substantially all
the activities necessary to prepare the qualifying asset for its intended use or sale are
interrupted or completed.
Foreign exchange gains and losses are included under finance income or expenses on a
net basis.
(v) Non-current assets held for sale
A non-current asset (or disposal group) is classified as held for sale if it is highly probable
that its carrying amount will be recovered through a sale transaction rather than through
continuing use and the asset (or disposal group) is available for sale in its present
condition. A disposal group is a group of assets to be disposed of together as a group in a
single transaction, and liabilities directly associated with those assets that will be
transferred in the transaction.
Immediately before classification as held for sale, the measurement of the non-current
assets (and all individual assets and liabilities in a disposal group) is brought up-to-date in
accordance with the accounting policies before the classification. Then, on initial
classification as held for sale and until disposal, the non-current assets (except for certain
assets as explained below), or disposal groups, are recognised at the lower of their
carrying amount and fair value less costs to sell. The principal exceptions to this
measurement policy so far as the consolidated financial statements of the Group are
concerned are deferred tax assets, assets arising from employee benefits and financial
assets (other than investments in associates and joint ventures). These assets, even if held
for sale, would continue to be measured in accordance with the policies set out elsewhere
in note 3.
Impairment losses on initial classification as held for sale, and on subsequent
remeasurement while held for sale, are recognised in profit or loss. As long as a non-
current asset is classified as held for sale, or is included in a disposal group that is
classified as held for sale, the non-current asset is not depreciated or amortised.
F-104
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
34
3 Significant accounting policies (continued)
(w) Related parties
(a) A person, or a close member of that person’s family, is related to the Group if that
person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or the Group’s
equity holders.
(b) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate
of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of
either the Group or an entity related to the Group.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the
entity).
Close members of the family of a person are those family members who may be expected
to influence, or be influenced by, that person in their dealings with the entity.
(x) Segment reporting
Operating segments, and the amounts of each segment item reported in the financial
statements, are identified from the financial information provided regularly to the
Group’s most senior executive management for the purposes of allocating resources to,
and assessing the performance of, the Group’s various lines of business and geographical
locations.
F-105
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
35
3 Significant accounting policies (continued)
(x) Segment reporting (continued)
Individually material operating segments are not aggregated for financial reporting
purposes unless the segments have similar economic characteristics and are similar in
respect of the nature of products and services, the nature of production processes, the type
or class of customers, the methods used to distribute the products or provide the services,
and the nature of the regulatory environment. Operating segments which are not
individually material may be aggregated if they share a majority of these criteria.
4 Changes in accounting policies
The IASB has issued the following amendments to IFRSs and one new Interpretation that
are first effective for the current accounting period of the Group.
Amendments to IFRS 10, IFRS 12 and IAS 27, Investment entities
Amendments to IAS 32, Offsetting financial assets and financial liabilities
Amendments to IAS 36, Recoverable amount disclosures for non-financial assets
Amendments to IAS 39, Novation of derivatives and continuation of hedge
accounting
IFRIC 21, Levies
The Group has not applied any new standard or interpretation that is not yet effective for
the current accounting period. Impacts of the adoption of the new or amended IFRSs are
discussed below:
Amendments to IFRS 10, IFRS 12 and IAS 27, Investment entities
The amendments provide consolidation relief to those parents which qualify to be an
investment entity as defined in the amended IFRS 10. Investment entities are required to
measure their subsidiaries at fair value through profit or loss. These amendments do not
have an impact on these consolidated financial statements as the Company does not
qualify to be an investment entity.
Amendments to IAS 32, Offsetting financial assets and financial liabilities
The amendments to IAS 32 clarify the offsetting criteria in IAS 32. The amendments do
not have a significant impact on these consolidated financial statements as they are
consistent with the policies already adopted by the Group.
F-106
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
36
4 Changes in accounting policies (continued)
Amendments to IAS 36, Recoverable amount disclosures for non-financial assets
The amendments to IAS 36 modify the disclosure requirements for impaired non-
financial assets. Among them, the amendments expand the disclosures required for an
impaired asset or cash-generating unit whose recoverable amount is based on fair value
less costs of disposal. The adoption of the amendments does not have an impact on these
consolidated financial statements because the Group does not have an impaired asset or
cash-generating unit whose recoverable amount is based on fair value less costs of
disposal during the periods presented.
Amendments to IAS 39, Novation of derivatives and continuation of hedge accounting
The amendments to IAS 39 provide relief from discontinuing hedge accounting when
novation of a derivative designated as a hedging instrument meets certain criteria. The
amendments do not have an impact on these consolidated financial statements as the
Group has not novated any of its derivatives.
IFRIC 21, Levies
The Interpretation provides guidance on when a liability to pay a levy imposed by a
government should be recognised. The amendments do not have an impact on these
consolidated financial statements as the guidance is consistent with the Group’s existing
accounting policies.
5 Revenue
2014 2013
RMB’000 RMB’000
Sale of goods and provision of services 288,115,825 238,947,809
Rental income (note 33(b)) 81,604 77,201
288,197,429 239,025,010
F-107
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
37
6 Expenses by nature
Note 2014 2013
RMB’000 RMB’000
Goods and services 170,409,334 149,653,288
Personnel expenses 8 71,808,598 52,450,149
Amortisation and depreciation 4,574,082 4,280,621
Impairment losses 3,831,760 1,971,120
Provision for tax cases 1,847,494 148,105
Operating lease charges 33(a) 3,244,985 3,457,831
Total cost of sales, research and
development expenses, selling expenses,
administrative expenses and other expenses 255,716,253 211,961,114
7 Other income and other expenses
(a) Other income
Note 2014 2013
RMB’000 RMB’000
Gain on disposal of property, plant and
equipment and intangible assets 20,261 1,028,839
Government grants (i) 1,033,438 464,609
Penalty income 185,320 154,659
Commissions on individual income
tax payments withheld 158,683 122,625
Others 326,696 293,810
1,724,398 2,064,542
(i) During the year ended 31 December 2014, the Group received unconditional
government grants of RMB421,622,000 (2013: RMB306,625,000) in respect of its
contributions to the development of research and innovation in the PRC. These
grants were directly recognised as other income.
During the year ended 31 December 2014, the Group received government grants
of RMB521,438,000 (2013: RMB686,125,000) which were conditional upon
completion of certain research and development projects. These grants were
initially recognised in the consolidated statement of financial position as deferred
government grants and are amortised through the consolidated statement of profit or
loss on a systematic basis in the same periods in which the related research and
development expenses are incurred. During the year ended 31 December 2014,
conditional government grants of RMB611,816,000 (2013: RMB157,984,000) were
recognised in profit or loss.
F-108
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
38
7 Other income and other expenses (continued)
(b) Other expenses
Note 2014 2013
RMB’000 RMB’000
Expense on factoring 841,411 550,483
Penalty expenses 237,613 225,196
Net loss on disposal of property, plant
and equipment and intangible assets 75,425 43,610
Impairment loss on intangible assets
and goodwill 13, 14 3,445,302 -
Provision for tax cases 1,847,494 148,105
Others 209,734 374,063
6,656,979 1,341,457
8 Personnel expenses
Note 2014 2013
RMB’000 RMB’000
Expenses recognised in respect of
defined benefit plan 30(iii) 1,917,625 1,337,794
Contributions to defined contribution
retirement plans 7,387,199 6,497,349
Total costs on post-employment plans 9,304,824 7,835,143
Expenses recognised in respect of
time-based unit plan (“TUP”) 963,487 24,982
Salaries, wages and other benefits 61,540,287 44,590,024
71,808,598 52,450,149
Defined contribution retirement plans
Pursuant to the relevant laws and regulations, the Group contributes to defined
contribution retirement plans for the respective group entities’ employees. The plans are
managed either by the government organisation at the location of the respective group
entities or by independent trustees. The amount of contributions made to the retirement
schemes is calculated using the method compliant with the respective laws and
regulations concerned.
F-109
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
39
8 Personnel expenses (continued)
TUP
TUP is a profit-sharing and bonus plan based on employee performance for all eligible
employees (“recipients”) in the Group. Under TUP, time-based units (“TBUs”) are
granted to the recipients, which entitle the recipients to receive cash incentive calculated
based on the annual profit-sharing amount and the cumulative end-of-term gain amount.
Both of the annual profit-sharing and the end-of-term gain amount are determined at the
discretion of the Group. The TBUs will have an exercise period of five years, and after
the first, second and third anniversary of the date of grant, each one third of the TBUs
will become exercisable and recipients will receive the annual profit-sharing amount
accordingly. The end-of-term gain amount will be paid to the recipients upon the expiry
of the TBUs or at the date the recipients resign or are dismissed. As at 31 December
2014, the valid TBUs granted were 1,051,400,894 units; liability and the corresponding
personnel expenses have been recognised in respect of 385,160,827 units of the valid
TBUs.
9 Net finance expenses
Note 2014 2013
RMB’000 RMB’000
Interest income 2,402,484 838,782
Net gain on disposal of available-for-sale
wealth management products and
securities stated at fair value 11(b) 820,800 1,056,473
Net gain on disposal of other
available-for-sale securities and
held-for-trading financial instruments 12,171 41,785
Dividend income from available-for-sale
equity securities 7,169 8,970
Finance income 3,242,624 1,946,010 ------------------ ------------------
Interest expense (1,658,907) (1,357,735)
Net foreign exchange loss (2,135,288) (3,686,178)
Impairment loss on available-for-sale
equity securities (3,566) -
Bank charges (450,820) (418,097)
Interest cost on defined benefit obligations 30(iii) (458,365) (469,007)
(4,706,946) (5,931,017)
Less: interest expense capitalised 8,972 42,255
Finance expenses (4,697,974) (5,888,762) ------------------ ------------------
Net finance expenses (1,455,350) (3,942,752)
F-110
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
40
9 Net finance expenses (continued)
The borrowing costs have been capitalised at a rate of 5.90% per annum in 2014 (2013:
5.90%).
10 Income tax in the consolidated statement of profit or loss
(a) Taxation in the consolidated statement of profit or loss represents:
Note 2014 2013
RMB’000 RMB’000
Current tax
Provision for the year 8,314,135 6,383,472
Under / (over)-provision in respect
of prior years 542,588 (77,737)
8,856,723 6,305,735
Deferred tax
Origination and reversal of temporary
differences 20(a) (3,669,738) (2,146,983)
5,186,985 4,158,752
F-111
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
41
10 Income tax in the consolidated statement of profit or loss (continued)
(b) Reconciliation between tax expense and accounting profit at applicable tax rates:
Note 2014 2013
RMB’000 RMB’000
Profit before taxation 33,053,399 25,161,769
Notional tax on profit before taxation,
calculated at the rates applicable to profits
in the tax jurisdictions concerned (i) 5,765,317 4,470,154
Effect on opening deferred tax balances resulting
from change in tax rates during the year (23,368) 104,942
Tax effect of bonus deduction of research and
development expenses, non-taxable income,
netted off by non-deductible expenses (ii) (1,316,667) (1,055,659)
Deferred tax liabilities recognised for the
undistributed profits of subsidiaries (18,106) 229,179
Tax effect of unused tax losses and deductible
temporary differences not recognised 569,620 963,889
Tax effect of utilisation of unused tax losses not
recognised in prior years (332,399) (476,016)
Under / (over)-provision in respect of prior years 542,588 (77,737)
Actual tax expense 5,186,985 4,158,752
(i) In accordance with the Corporate Income Tax Law of the PRC effective from 1
January 2008, enterprises established in the PRC are subject to PRC corporate
income tax at the statutory rate of 25% unless otherwise specified.
Pursuant to the rules and regulations applicable to advanced technology enterprises
established in the PRC, certain domestic subsidiaries are subject to PRC corporate
income tax at a preferential tax rate of 15%. Some qualified domestic subsidiaries
enjoy respective preferential policies in accordance with the Corporate Income Tax
Law of the PRC.
Overseas subsidiaries are charged at the appropriate current rates of taxation ruling
in the relevant countries in which they operate.
(ii) According to relevant tax rules in the PRC, certain research and development
expenses qualify for bonus deduction for income tax purpose, i.e. an additional 50%
of such expenses may be deemed as tax deductible expenses.
F-112
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
42
11 Other comprehensive income
(a) Tax effects relating to each component of other comprehensive income
2014 2013 Tax Before-tax Tax Net-of-tax Before-tax benefit/ Net-of-tax amount benefit amount amount (expense) amount RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
(Note 20(a)) (Note 20(a))
Remeasurement of
defined benefit
obligations
- The Group (195,410) 29,525 (165,885) (719,613) 102,088 (617,525)
- Share of associates
and joint ventures (178) - (178) (702) - (702)
(195,588) 29,525 (166,063) (720,315) 102,088 (618,227) ----------- ----------- ----------- ----------- ----------- -----------
Net change in the
fair value of
available-for-sale
securities (217,897) 17,857 (200,040) 186,702 (21,745) 164,957 ----------- ----------- ----------- ----------- ----------- -----------
Exchange differences
on translation
of financial
statements of
foreign operations
- The Group 174,357 - 174,357 228,666 - 228,666
- Share of associates
and joint ventures (699) - (699) 907 - 907
173,658 - 173,658 229,573 - 229,573 ----------- ----------- ----------- ----------- ----------- -----------
Other comprehensive
income (239,827) 47,382 (192,445) (304,040) 80,343 (223,697)
F-113
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
43
11 Other comprehensive income (continued)
(b) Components of other comprehensive income, including reclassification adjustments
2014 2013
RMB’000 RMB’000
Available-for-sale securities:
Changes in fair value recognised during the year 602,903 1,243,175
Reclassification adjustment for amounts transferred
to profit or loss:
- Gain on disposal (note 9) (820,800) (1,056,473)
Net deferred tax credited / (charged) to other
comprehensive income 17,857 (21,745)
Net movement in the fair value reserve during the
year recognised in other comprehensive income (200,040) 164,957
12 Segment reporting
The Group divides its business into three operating segments in accordance with the types
of products and services provided:
Carrier Network
Develops and manufactures a wide range of wireless network, fixed network, carrier
software and core network, as well as services solutions to telecommunications
operators.
Enterprise
Develops integratable information and communication technology (“ICT”) products
and solutions including enterprise network infrastructure, cloud-based green data
centers, enterprise information security and unified communication & collaboration,
and delivers these solutions to vertical industries such as governments & public
utilities, enterprises, energy, power, transportation and finance.
F-114
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
44
12 Segment reporting (continued)
Consumers
Develops and manufactures mobile broadband devices, home devices, smartphones,
as well as the applications on these devices, and delivers them to consumers and
businesses.
The reportable segments are determined based on the Group’s organisation structure,
management requirement and reporting system.
Each reportable segment is managed separately because each requires different
technology and marketing strategies. The financial information of the different segments
is regularly reviewed by the Group’s most senior executive management for the purpose
of resource allocation and performance assessment.
(i) Segment results, assets and liabilities
For the purposes of assessing segment performance and allocating resources between
segments, the Group’s senior executive management monitors the results of operations
and assets attributable to each reportable segment on the following bases:
Segment assets include all tangible, intangible assets and current assets with the
exception of interest in associates, interest in joint ventures, other investments, deferred
tax assets and other corporate assets.
The Group’s senior executive management may adjust the segment reporting solution
from year to year based on the development of business. Comparatives will be
represented to comply with the current year presentation.
Results of operations are profit before taxation attributable to the individual segments.
2014
Carrier Unallocated
Network Enterprise Consumers items Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Reportable segment revenue 192,073,188 19,390,958 75,100,521 1,632,762 288,197,429
Reportable segment profit
(profit before taxation) 43,590,427 (468,920) 4,934,383 (15,002,491) 33,053,399
Reportable segment assets 86,302,156 3,636,885 14,723,882 205,109,775 309,772,698
Total liabilities 209,787,621
Other segment information
Depreciation and amortisation 1,054,423 217,138 330,598 2,971,923 4,574,082
Impairment of intangible assets
and goodwill - 3,445,302 - - 3,445,302
Capital expenditure (Note (a)) 2,722,951 411,856 399,949 5,465,095 8,999,851
F-115
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
45
12 Segment reporting (continued)
(i) Segment results, assets and liabilities (continued)
2013
Carrier Unallocated
Network Enterprise Consumers items Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Reportable segment revenue 164,946,941 15,238,278 56,617,468 2,222,323 239,025,010
Reportable segment profit
(profit before taxation) 26,080,148 (1,698,178) 3,297,175 (2,517,376) 25,161,769
Reportable segment assets 79,052,480 7,204,287 12,465,012 145,368,823 244,090,602
Total liabilities 157,824,486
Other segment information
Depreciation and amortisation 1,621,995 361,615 390,466 1,906,545 4,280,621
Impairment of intangible assets
and goodwill - - - - -
Capital expenditure (Note (a)) 1,153,693 213,212 708,760 5,748,067 7,823,732
(a) Expenditure incurred on acquisition of property, plant and equipment, long-term
leasehold prepayments and intangible assets excluding assets acquired as part of
business combinations and goodwill.
(ii) Geographic information
The following table sets out information about the geographical location of (i) the
Group’s revenue from external customers and (ii) the Group’s non-current assets
excluding deferred tax assets (“specified non-current assets”). The geographical location
of customers is based on the location at which the services were provided or the goods
were delivered. The geographical location of the specified non-current assets is based on
the location of operations to which the assets are related.
Revenue from Specified
external customers non-current assets
2014 2013 2014 2013
RMB'000 RMB'000 RMB'000 RMB'000
China 108,881,281 82,785,037 32,319,946 24,546,602
Americas 30,851,970 29,346,321 949,005 1,412,982
Asia Pacific 42,423,639 38,691,006 1,864,068 5,127,999
Europe, the Middle East
and Africa 100,990,432 84,005,343 2,618,951 2,023,483
Others 5,050,107 4,197,303 - -
Total 288,197,429 239,025,010 37,751,970 33,111,066
F-116
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
46
12 Segment reporting (continued)
Major customer
Revenue from one customer of the Group of RMB50,310,821,000 (2013:
RMB37,096,576,000) represents approximately 17% (2013: 16%) of the Group’s total
revenue.
13 Goodwill
Note 2014 2013
RMB’000 RMB’000
Cost:
At 1 January 3,565,836 3,608,582
Exchange adjustment 44,269 (87,124)
Acquisitions through business combinations 37(c) 108,175 44,378
At 31 December 3,718,280 3,565,836 ------------------ ------------------ Accumulated impairment losses:
At 1 January 223,119 219,792
Exchange adjustment (35,626) 3,327
Impairment loss 7(b) 3,223,462 -
At 31 December 3,410,955 223,119 ------------------ ------------------ Carrying amount:
At 31 December 307,325 3,342,717
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the Group’s cash-generating units (“CGU”) or group of CGUs,
which is either an operating segment or at a level not larger than an operating segment, as
follows:
2014 2013
RMB’000 RMB’000
Sectors under Enterprise business group - 3,139,188
Beijing Huawei Longshine Information Technology
Company Limited (“Beijing Huawei Longshine”) 154,368 154,368
Others 152,957 49,161
307,325 3,342,717
F-117
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
47
13 Goodwill (continued)
Impairment tests for cash-generating units containing goodwill (continued)
Goodwill is allocated to the Group’s CGUs expected to benefit from the synergies of the
acquisitions. For impairment assessment purposes, the recoverable amounts of the CGUs
are based on their value-in-use calculations. The value-in-use calculations apply a
discounted cash flow model using cash flow projections based on financial budgets
approved by management covering a five-year period, based on their industry expertise.
The key assumptions for the calculation of value-in-use include the discount rates and
growth rates applied. Discount rates used are pre-tax and reflect specific risks relating to
respective CGU or group of CGUs. Cash flows beyond the aforementioned approved
financial budget’s periods are extrapolated using an estimated growth rate applied. The
growth rate does not exceed the long-term average growth rate for the business in which
the CGU or group of CGUs operates. Discount rates and growth rates applied for the
computation of value-in-use are as follows:
As at 31 December
2014 2013
% %
Sectors under Enterprise business group
- Discount rate 16.4 17.0
- Terminal value growth rate 3.0 5.0
Beijing Huawei Longshine
- Discount rate 15.5 17.9
- Terminal value growth rate 3.0 3.0
Due to technology development and market change, the Group’s expectation for the
future growth and profitability of the acquired sectors under Enterprise business group are
lower than previous estimates. Therefore, the acquired sectors under Enterprise business
group were determined to be impaired. During the year, based on the abovementioned
impairment test, impairment loss of RMB3,223,462,000 and RMB221,840,000 was
recognized respectively for the goodwill allocated to and the intangible assets of the
acquired sectors under Enterprise business group; and the goodwill relating to this CGU
was reduced to nil. The impairment loss is recognized in the consolidated income
statement as “other expenses”.
F-118
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
48
14 Intangible assets Software Patents Trademark Total
RMB’000 RMB’000 RMB’000 RMB’000
Cost:
At 1 January 2013 1,686,827 1,675,548 81,951 3,444,326
Exchange adjustment (25,882) (2,011) 783 (27,110)
Additions 519,245 559,175 4,036 1,082,456
Acquisition of subsidiaries 95,992 46,265 75 142,332
Disposals (27,088) (99,591) (390) (127,069)
At 31 December 2013 2,249,094 2,179,386 86,455 4,514,935 -------------- -------------- -------------- --------------
At 1 January 2014 2,249,094 2,179,386 86,455 4,514,935
Exchange adjustment (42,029) (18,240) (5,151) (65,420)
Additions 435,541 136,373 8,811 580,725
Acquisition of subsidiaries
(note 37(c)) - 58,918 - 58,918
Disposals (27,779) (31,215) (626) (59,620)
At 31 December 2014 2,614,827 2,325,222 89,489 5,029,538 -------------- -------------- -------------- --------------
Accumulated amortisation
and impairment losses:
At 1 January 2013 1,081,414 634,398 39,646 1,755,458
Exchange adjustment (14,287) (710) 253 (14,744)
Amortisation for the year 263,439 191,870 6,611 461,920
Disposals (18,729) (78,914) (361) (98,004)
At 31 December 2013 1,311,837 746,644 46,149 2,104,630 -------------- -------------- -------------- --------------
At 1 January 2014 1,311,837 746,644 46,149 2,104,630
Exchange adjustment (16,055) 109 (2,143) (18,089)
Amortisation for the year 271,542 195,992 8,290 475,824
Impairment loss (note 7(b)/13) - 221,840 - 221,840
Disposals (21,169) (23,287) (626) (45,082)
At 31 December 2014 1,546,155 1,141,298 51,670 2,739,123 -------------- -------------- -------------- --------------
Carrying amounts:
At 31 December 2014 1,068,672 1,183,924 37,819 2,290,415
At 31 December 2013 937,257 1,432,742 40,306 2,410,305
F-119
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
49
14 Intangible assets (continued)
The amortisation charge for the year is included in “cost of sales”, “research and
development expenses”, “selling expenses” and “administrative expenses” in the
consolidated statement of profit or loss. The impairment losses are included in “other
expenses” in the consolidated statement of profit or loss.
F-120
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F-121
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ing C
o.,
Ltd
.
Co
nso
lida
ted
fin
an
cial
sta
tem
ents
fo
r th
e ye
ar
end
ed 3
1 D
ecem
ber
20
14
51
15
Pro
per
ty,
pla
nt
an
d e
qu
ipm
ent
(co
nti
nu
ed)
Ma
chin
ery,
el
ectr
on
ic
eq
uip
men
t
Dec
ora
tio
n
F
reeh
old
an
d o
ther
M
oto
r C
on
stru
ctio
n
Inve
stm
ent
an
d l
ease
ho
ld
la
nd
Bu
ild
ing
s eq
uip
men
t ve
hic
les
in p
rog
ress
p
rop
erty
im
pro
vem
ents
T
ota
l
R
MB
’000
RM
B’0
00
RM
B’0
00
RM
B’0
00
RM
B’0
00
RM
B’0
00
RM
B’0
00
RM
B’0
00
Acc
um
ula
ted
dep
reci
ati
on
:
At
1 J
anu
ary 2
01
3
- 2
,166
,68
0
10
,15
7,3
54
35
2,5
05
- 2
84
,819
3,4
98
,39
6
16
,45
9,7
54
Exch
ange
adju
stm
ent
- (1
,66
5)
(17
5,6
24
) (1
1,5
75
) -
- (4
2,3
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) (2
31
,20
1)
Dep
reci
atio
n c
har
ge
for
the
yea
r -
40
8,1
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02
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68
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0
- 2
1,8
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85
5,9
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1
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po
sals
-
(18
,183
) (6
66
,69
0)
(49
,373
) -
- (3
5,7
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) (7
69
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7)
At
31
Dec
emb
er 2
013
-
2,5
55
,02
0
11
,71
7,5
12
35
9,9
57
- 3
06
,712
4,2
76
,35
6
19
,21
5,5
57
----
----
----
--
----
----
----
--
----
----
----
--
----
----
----
--
----
----
----
--
----
----
----
--
---
----
----
---
----
----
----
--
At
1 J
anu
ary 2
01
4
- 2
,555
,02
0
11
,71
7,5
12
35
9,9
57
- 3
06
,712
4,2
76
,35
6
19
,21
5,5
57
Exch
ange
adju
stm
ent
- (8
7)
(24
4,1
04
) (1
8,6
49
) -
- (3
6,3
11
) (2
99
,15
1)
Dep
reci
atio
n c
har
ge
for
the
yea
r -
46
9,7
13
2,3
91
,00
9
63
,78
5
- 3
,024
1,0
90
,66
3
4,0
18
,19
4
Tra
nsf
er f
rom
in
ves
tmen
t p
rop
erty
-
85
,30
7
77
,15
4
- -
(22
6,1
25
) 6
3,6
64
-
Dis
po
sals
-
(2,3
91
) (7
93
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3)
(65
,117
) -
- (7
9,0
40
) (9
39
,91
1)
At
31
Dec
emb
er 2
014
-
3,1
07
,56
2
13
,14
8,2
08
33
9,9
76
- 8
3,6
11
5,3
15
,33
2
21
,99
4,6
89
--
----
----
----
--
----
----
----
--
----
----
----
--
----
----
----
--
----
----
----
--
----
----
----
-
----
----
----
- --
----
----
----
C
arr
yin
g a
mo
un
ts:
At
31
Dec
emb
er 2
014
1
43
,416
9
,068
,81
5
9,4
65
,38
3
18
7,8
41
5,5
88
,51
3
16
,83
1
2,7
76
,81
7
27
,24
7,6
16
At
31
Dec
emb
er 2
013
1
06
,426
6
,873
,00
8
7,7
83
,76
8
18
3,0
13
4,9
10
,11
3
12
7,3
81
2,2
25
,32
0
22
,20
9,0
29
F-122
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
52
15 Property, plant and equipment (continued)
Investment property
The Group leased out certain buildings to third parties. Such buildings are classified as
investment property.
The carrying value of investment property as at 31 December 2014 is RMB16,831,000
(2013: RMB127,381,000). The fair value of investment property as at 31 December
2014 is estimated by management to be RMB71,131,000 (2013: RMB251,875,000).
The fair value of investment property is determined by the Group internally with
reference to market conditions and discounted cash flow forecasts. The Group’s current
lease agreements, which were entered into on an arm’s-length basis, are taken into
account when estimating future cash flow. The fair value measurement is categorised into
level 3 of the three-level fair value hierarchy as defined in IFRS 13, Fair value
measurement (note 32(e)(ii)).
16 Long-term leasehold prepayments
2014 2013
RMB’000 RMB’000
At 1 January 2,761,112 2,360,926
Additions 606,708 461,936
Acquisition of subsidiaries (note 37(c)) 61,476 -
Amortisation for the year (80,064) (61,750)
At 31 December 3,349,232 2,761,112
F-123
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
53
17 Interest in associates 2014 2013
RMB’000 RMB’000
Share of net assets 559,153 264,740
Goodwill 4,996 4,996
564,149 269,736
Less: impairment loss (15,748) -
548,401 269,736
The following list contains only the particulars of material associates, all of which are
unlisted corporate entities whose quoted market price is not available:
Place of Proportion
Form of business incorporation of ownership Nature of the
Name of associate structure and business interest relationship
2014 2013
TD Tech Holding Incorporated Hong Kong, 49% 49% Note a
Limited (“TD Tech”) PRC
Tianwen Digital Media Incorporated Beijing, PRC 49% 49% Note b
Technology (Beijing)
Co., Ltd. (“Tianwen
Digital Media”)
Note a: TD Tech’s principal activity is research and development, production and sale of
TD-SCDMA telecommunication products.
Note b: Tianwen Digital Media’s principal activity is development, publication and
operation of digital media related services.
All of the associates are accounted for using the equity method in the consolidated
financial statements.
F-124
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
54
17 Interest in associates (continued)
Summarised financial information of the material associates, reconciled to the carrying
amounts in the consolidated financial statements, are disclosed below:
TD Tech Tianwen Digital Media
2014 2013 2014 2013 RMB'000 RMB'000 RMB'000 RMB'000
Gross amounts of the associates’
Current assets 3,949,320 368,539 431,544 302,292
Non-current assets 49,427 55,836 7,612 8,476
Current liabilities (3,412,238) (429,069) (158,938) (60,498)
Non-current liabilities (108,593) (86,952) (7,200) (1,660)
Equity (deficit) 477,916 (91,646) 273,018 248,610
Revenue 7,604,324 3,972,117 233,407 138,818
Profit / (loss) (note a) 233,787 (169,730) 24,408 1,214
Total comprehensive income (note a) 233,787 (169,730) 24,408 1,214
Reconciled to the Group’s interest in the associates
Gross amounts of net assets of the
associate 477,916 (91,646) 273,018 248,610
Group’s effective interest 49% 49% 49% 49%
Group’s share of net assets of the
associate 202,454 (44,907) 133,779 121,819
Goodwill - - 4,996 4,996
Net loss not shared by the Group - 44,907 - -
Carrying amount in the consolidated
financial statements 202,454 - 138,775 126,815
Note a: As the issuance date of the Group’s consolidated financial statements is ahead of
TD Tech’s audit report date, the Group applies the equity method to account for
its investment in TD Tech based on unaudited financial information contained in
TD Tech’s management accounts, which may differ from TD Tech’s audited
results. The differences are to be accounted for in the Group’s next financial
period.
Aggregate information of associates that are not individually material:
2014 2013
RMB’000 RMB’000
Aggregate carrying amount of individually immaterial
associates in the consolidated financial statements 207,172 142,921
Aggregate amounts of the Group’s share of those associates’
Profit 62,395 41,738
Other comprehensive income 275 -
Total comprehensive income 62,670 41,738
F-125
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
55
18 Interest in joint ventures 2014 2013
RMB’000 RMB’000
Share of net assets 107,249 210,869
Details of the Group’s interest in the material joint venture are as follows:
Place of Proportion
Form of business incorporation of ownership Nature of the
Name of joint venture structure and business interest relationship
2014 2013
Huawei Marine Incorporated Hong Kong, 51% 51% Note a
Systems Co., Ltd. PRC
(“Huawei Marine”)
Note a: Huawei Marine’s principal activity is construction and operation of submarine
fibres. Huawei Marine is an unlisted corporate entity whose quoted market price
is not available.
Chengdu Huawei Investment Co., Ltd. (“CD Investment”), a limited company
incorporated in the PRC, was previously a joint venture of the Group, with 51% and 49%
equity interests held by a third party and the Company respectively. According to an
agreement entered into by the Company and the third party on 28 February 2014, the
Company acquired the 51% equity interests held by the third party with a consideration
of RMB245,177,000 in March 2014. After the acquisition, CD Investment became a
wholly-owned subsidiary of the Company. Please refer to note 37(c)(ii) for the details of
the acquisition. The Group’s share of CD Investment’s net loss before the acquisition
(from January to March 2014) amounted to RMB5,107,000.
All of the joint ventures are accounted for using the equity method in the consolidated
financial statements.
F-126
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
56
18 Interest in joint ventures (continued)
Summarised financial information of the material joint ventures, reconciled to the
carrying amounts in the consolidated financial statements, are disclosed below:
Huawei Marine CD Investment
2014 2013 2014 2013
RMB'000 RMB'000 RMB’000 RMB’000
Gross amounts of the joint ventures’
Current assets 734,066 439,089 n/a 172,901
Non-current assets 15,658 19,843 n/a 1,422,159
Current liabilities (598,401) (322,109) n/a (239,233)
Non-current liabilities (18,568) (12,645) n/a (1,136,631)
Equity 132,755 124,178 n/a 219,196
Included in the above assets
and liabilities:
Cash and cash equivalents 107,163 98,458 n/a 4,205
Non-current financial liabilities
(excluding trade and other payables
and provisions) - - n/a (1,136,631)
Revenue 487,778 497,765 n/a 241,251
Profit / (loss) 7,770 19,915 n/a (74,793)
Other comprehensive income (2,260) 402 n/a -
Total comprehensive income 5,510 20,317 n/a (74,793)
Included in the above profit / (loss):
Depreciation and amortisation (9,137) (11,067) n/a (190,137)
Interest income 161 206 n/a 65
Interest expense - - n/a (71,505)
Income tax expense (398) (990) n/a (668)
Reconciled to the Group’s interest
in the joint ventures
Gross amounts of net assets of the
joint venture 132,755 124,178 n/a 219,196
Group’s effective interest 51% 51% n/a 49%
Group’s share of net assets of the
joint venture 67,705 63,331 n/a 107,406
Elimination of unrealised profit on
downstream transactions 244 - n/a -
Carrying amount in the consolidated
financial statements 67,949 63,331 n/a 107,406
F-127
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
57
18 Interest in joint ventures (continued)
Aggregate information of joint ventures that are not individually material:
2014 2013
RMB’000 RMB’000
Aggregate carrying amount of individually immaterial
joint ventures in the consolidated financial statements 39,300 40,132
Aggregate amounts of the Group’s share of those
joint ventures’
Loss (832) (1,498)
Total comprehensive income (832) (1,498)
19 Other investments
Note 2014 2013
RMB’000 RMB’000
Unlisted equity securities stated at cost 516,393 477,327
Listed equity securities stated at fair value 7,093 118,047
Debt securities stated at fair value 36,567 4,684
560,053 600,058
Less: Impairment loss (i) (19,963) (16,184)
540,090 583,874
(i) As at 31 December 2014 and 2013, certain of the Group’s other investments were
individually determined to be impaired on the basis of a material decline and
adverse changes in the market in which the investees operated. This indicated that
the cost of these investments may not be recovered. Impairment losses on these
investments are recognised in profit or loss in accordance with the policy set out in
note 3(m).
F-128
Hu
aw
ei I
nve
stm
ent
& H
old
ing C
o.,
Ltd
.
Co
nso
lida
ted
fin
an
cial
sta
tem
ents
fo
r th
e ye
ar
end
ed 3
1 D
ecem
ber
20
14
58
20
Def
erre
d t
ax
ass
ets
/ (l
iab
ilit
ies)
(a)
Th
e co
mpon
ents
of
def
erre
d t
ax a
sset
s /
(lia
bil
itie
s) r
eco
gn
ised
in
th
e co
nso
lid
ate
d s
tate
men
t o
f fi
na
nci
al
po
siti
on
an
d t
he
mo
vem
ents
du
rin
g t
he
year
are
as
foll
ow
s:
A
ccru
ed
D
epre
cia
tio
n
Pro
visi
on
F
air
va
lue
b
on
us
Pro
visi
on
o
f p
rop
erty
, fo
r D
efin
ed
Un
dis
trib
ute
d
a
dju
stm
ents
on
Def
erre
d t
ax
a
nd
oth
er
for
pla
nt
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d
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air
men
t b
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x p
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ts o
f U
nre
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sed
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cqu
isit
ion
of
ari
sin
g f
rom
: ex
pen
ses
wa
rra
nti
es
equ
ipm
ent
loss
es
ob
lig
ati
on
s lo
sses
su
bsi
dia
ries
p
rofi
t su
bsi
dia
ries
O
ther
s T
ota
l
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
At
1 J
anuar
y 2
01
3
3,2
90,4
28
3
46
,21
6
32
0,7
23
1,0
87,9
42
1,1
08,3
64
23
5,8
59
(46
7,8
52)
2,4
88,2
73
(9
2,2
26
) 7
03
,52
7
9,0
21,2
54
Exch
an
ge
adju
stm
ent
(12
,90
3)
41
,276
(18
,78
7)
(10
7,9
20)
(31
,97
6)
(8,8
93
) 6
,57
6
(21
9)
1,1
59
(15
,49
7)
(14
7,1
84)
Cre
dit
ed /
(ch
arged
)
to p
rofi
t o
r lo
ss
(no
te 1
0(a
))
98
4,3
08
79
,338
(32
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1)
(8,8
87
) (1
67
,54
2)
(12
0,4
59)
30
1,8
25
64
3,3
09
16
,574
45
0,9
78
2,1
46,9
83
Cre
dit
ed /
(ch
arged
)
to o
ther
com
pre
hensi
ve
inco
me
(no
te 1
1(a
))
- -
- -
10
2,0
88
- -
- -
(21
,74
5)
80
,343
Acq
uis
itio
n o
f
sub
sid
iari
es
- -
- -
- -
- -
(57
3)
- (5
73
)
At
31
Dec
em
ber
201
3
4,2
61,8
33
4
66
,83
0
26
9,4
75
97
1,1
35
1,0
10,9
34
10
6,5
07
(15
9,4
51)
3,1
31,3
63
(7
5,0
66
) 1
,11
7,2
63
1
1,1
00
,82
3
F-129
Hu
aw
ei I
nve
stm
ent
& H
old
ing C
o.,
Ltd
.
Co
nso
lida
ted
fin
an
cial
sta
tem
ents
fo
r th
e ye
ar
end
ed 3
1 D
ecem
ber
20
14
59
20
Def
erre
d t
ax
ass
ets
/ (l
iab
ilit
ies)
(co
nti
nu
ed)
(a)
Th
e co
mpon
ents
of
def
erre
d t
ax a
sset
s /
(lia
bil
itie
s) r
eco
gn
ised
in
th
e co
nso
lid
ate
d s
tate
men
t o
f fi
na
nci
al
po
siti
on
an
d t
he
mo
vem
ents
du
rin
g t
he
year
are
as
foll
ow
s (c
on
tin
ued
):
A
ccru
ed
D
epre
cia
tio
n
Pro
visi
on
F
air
va
lue
b
on
us
Pro
visi
on
o
f p
rop
erty
, fo
r D
efin
ed
Un
dis
trib
ute
d
a
dju
stm
ents
on
Def
erre
d t
ax
an
d o
ther
fo
r p
lan
t an
d
imp
air
men
t b
enef
it
Ta
x p
rofi
ts o
f U
nre
ali
sed
a
cqu
isit
ion
of
ari
sin
g f
rom
: ex
pen
ses
wa
rra
nti
es
equ
ipm
ent
loss
es
ob
lig
ati
on
s lo
sses
su
bsi
dia
ries
p
rofi
t su
bsi
dia
ries
O
ther
s T
ota
l
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
RM
B’0
00
R
MB
’00
0
At
1 J
anuar
y 2
01
4
4,2
61,8
33
4
66
,83
0
26
9,4
75
97
1,1
35
1,0
10,9
34
10
6,5
07
(15
9,4
51)
3,1
31,3
63
(7
5,0
66
) 1
,11
7,2
63
1
1,1
00
,82
3
Exch
an
ge
adju
stm
ent
(33
,83
3)
(80
,81
9)
(45
,75
6)
(78
,79
8)
(11
,45
3)
(23
,54
6)
63
7
17
,425
1,4
86
44
,822
(20
9,8
35)
Cre
dit
ed /
(ch
arged
)
to p
rofi
t o
r lo
ss
(
no
te 1
0(a
))
2,8
34,3
89
12
9,6
40
(2,9
38
) (1
9,5
53
) 2
50
,64
8
89
,106
18
,106
31
1,0
04
51
,539
7,7
97
3,6
69,7
38
Cre
dit
ed t
o o
ther
com
pre
hensi
ve
inco
me
(no
te 1
1(a
))
- -
- -
29
,525
- -
- -
17
,857
47
,382
Acq
uis
itio
n o
f
sub
sid
iari
es
- -
- -
- -
- -
(12
,37
3)
- (1
2,3
73
)
At
31
Dec
em
ber
201
4
7,0
62,3
89
51
5,6
51
22
0,7
81
87
2,7
84
1,2
79,6
54
17
2,0
67
(14
0,7
08)
3,4
59,7
92
(3
4,4
14
) 1
,18
7,7
39
1
4,5
95
,73
5
F-130
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
60
20 Deferred tax assets / (liabilities) (continued)
(a) The components of deferred tax assets / (liabilities) recognised in the consolidated
statement of financial position and the movements during the year are as follows
(continued):
Reconciliation to the consolidated statement of financial position
2014 2013
RMB’000 RMB’000
Net deferred tax assets recognised in the
consolidated statement of financial position 14,916,223 11,576,567
Net deferred tax liabilities recognised in the
consolidated statement of financial position (320,488) (475,744)
14,595,735 11,100,823
(b) Deferred tax assets not recognised
As at 31 December 2014 and 2013, deferred tax assets were not recognised in relation to
certain unused tax losses and other deductible temporary differences. The unrecognized
unused tax losses and deductible temporary differences are analysed as follows:
2014 2013
RMB’000 RMB’000
Other deductible temporary differences 1,304,201 1,007,558
Tax losses 1,358,272 1,463,188
2,662,473 2,470,746
Deferred tax assets have not been recognised in respect of certain provisions for
impairment losses and other provisions as management believes that these provisions are
unlikely to be allowed for tax deduction by the relevant tax authorities.
Deferred tax assets have not been recognised in respect of certain unused tax losses as it
was determined by management that it is not probable that future taxable profits against
which the tax losses can be utilised will be available before they expire.
F-131
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
61
21 Inventories
(a) Inventories in the consolidated statement of financial position comprise:
2014 2013
RMB’000 RMB’000
Raw materials 6,261,070 5,990,340
Manufacturing work in progress 5,223,644 4,149,514
Finished goods 11,615,408 6,076,866
Contract work in progress 23,475,798 8,712,211
46,575,920 24,928,931
(b) The analysis of the amount of inventories recognised as an expense and included in
profit or loss is as follows:
2014 2013
RMB’000 RMB’000
Carrying amount of inventories sold 116,061,729 99,693,863
Write down of inventories 2,119,991 1,230,579
118,181,720 100,924,442
F-132
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
62
22 Trade and bills receivable
Note 2014 2013
RMB’000 RMB’000
Restated
(Note 40)
Trade receivables
Trade receivables due from third parties 75,018,145 71,979,421
Trade receivables due from related parties 36 827,113 372,770
75,845,258 72,352,191 ------------------ ------------------
Bills receivable
Bank acceptance bills 2,333,570 2,224,077
Commercial acceptance bills 999,668 2,966,686
Letter of credit receivables 847,101 797,956
4,180,339 5,988,719 ------------------ ------------------
80,025,597 78,340,910
Non-current portion 445,969 335,603
Current portion 79,579,628 78,005,307
80,025,597 78,340,910
(a) Ageing analysis
At the end of the reporting period, the ageing analysis of trade receivables due from third
parties is as follows:
2014 2013
RMB’000 RMB’000
Restated
(Note 40)
Not past due 55,700,278 56,693,306
Less than 90 days past due 15,120,496 10,698,668
90 days to 1 year past due 7,705,655 7,574,686
1 year and above past due 1,558,620 1,352,729
80,085,049 76,319,389
Less: Allowance for doubtful debts (5,066,904) (4,339,968)
75,018,145 71,979,421
F-133
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
63
22 Trade and bills receivable (continued)
(b) Impairment of trade receivables due from third parties
Impairment losses in respect of trade receivables due from third parties are recorded
using an allowance account unless the Group is satisfied that recovery of the amount is
remote, in which case the impairment loss is written off against the trade receivables due
from third parties directly (see note 3(m)).
The movement in the allowance for doubtful debts in respect of trade receivables due
from third parties during the year is as follows:
2014 2013
RMB’000 RMB’000
At 1 January 4,339,968 3,486,991
Exchange adjustment 116,704 (519,285)
Impairment loss recognised 71,778 1,074,652
Collection of previously written-off debtors 895,776 410,501
Uncollectible amounts written off (357,322) (112,891)
At 31 December 5,066,904 4,339,968
As at 31 December 2014, specific allowance of RMB2,609,869,000 (2013:
RMB2,494,486,000) was recognised as a result of the assessment of the Group’s trade
receivables due from third parties of RMB3,380,103,000 (2013: RMB4,353,560,000) that
were individually determined to be impaired. The individually impaired trade receivables
mainly relate to customers who are in financial difficulties and the likelihood of recovery
is expected to be in doubt.
(c) Trade receivables due from third parties that are neither past due nor impaired
The analysis of trade receivables due from third parties that are neither individually nor
collectively considered to be impaired is as follows:
2014 2013
RMB’000 RMB’000
Restated
(Note 40)
Neither past due nor impaired 51,973,579 53,334,692
Receivables that are neither past due nor impaired relate to a wide range of customers for
whom there was no recent history of default.
F-134
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
64
22 Trade and bills receivable (continued)
(d) Trade receivables due from related parties
The Group monitors the trade receivables due from related parties on an ongoing basis
considering the financial results of the related parties and repayments made by the related
parties. As at 31 December 2014, impairment loss of RMB16,801,000 (2013: nil) was
recognised in respect of trade receivables due from related parties.
23 Other assets
Note 2014 2013
RMB’000 RMB’000
Restated
(Note 40)
Advance payments to suppliers 1,932,013 1,605,242
Prepayment for acquisition of long-term
leasehold land 29,551 180,856
Tax related assets 7,117,029 5,103,123
Pledged deposits 2,530,137 1,805,091
Proceeds receivable from disposal
of associates 23,900 23,900
Other receivables due from third parties 12,508,207 6,130,973
Other receivables due from
related parties 36 3,276,241 353,687
Loans receivable - 130
Other long-term deferred assets 411,233 309,944
27,828,311 15,512,946
Non-current portion 2,915,673 987,821
Current portion 24,912,638 14,525,125
27,828,311 15,512,946
24 Short-term investments
2014 2013
RMB’000 RMB’000
Debt securities stated at fair value 662,396 -
Wealth management products 27,326,268 8,544,966
27,988,664 8,544,966
F-135
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
65
25 Cash and cash equivalents
2014 2013
RMB’000 RMB’000
Cash in hand 12,594 5,380
Deposits with banks and other financial institutions 55,802,161 61,793,260
Highly liquid short-term investments 22,232,900 11,600,000
Cash and cash equivalents in the consolidated
statement of financial position and the consolidated
statement of cash flows 78,047,655 73,398,640
As at 31 December 2014, the Group had short-term investments of RMB22,232,900,000
(2013: RMB11,600,000,000) purchased from commercial banks with maturities of less
than three months. These short-term investments were highly liquid, readily convertible
into known amounts of cash and were subject to an insignificant risk of changes in value.
These short-term investments were all subsequently matured and settled before March
2015.
As at 31 December 2014, cash and cash equivalents of RMB1,009,792,000 (2013:
RMB1,301,603,000) were held in countries where exchange controls or other legal
restrictions are appliable.
26 Capital, reserves and dividends
(a) Movements in components of equity
The reconciliation between the opening and closing balances of each component of the
Group’s consolidated equity is set out in the consolidated statement of changes in equity.
(b) Dividends payable to equity holders of the Company attributable to the previous
financial years, approved and paid during the year
2014 2013
RMB’000 RMB’000
Final dividend in respect of the previous financial
years, approved and paid during the year 17,770,290 15,495,429
(c) Capital surplus
Capital surplus represents the portion of the fair value of capital contributions made by
the investors in excess of the registered capital.
F-136
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
66
26 Capital, reserves and dividends (continued)
(d) Statutory reserves
According to the relevant rules and regulations and the Articles of Association of the
Company and certain of its subsidiaries, the Company and the relevant subsidiaries are
required to transfer certain of their profit after tax to their statutory reserves. The transfer
to the reserves must be made before the distribution of dividends to investors. Statutory
reserves can be used to reduce previous years’ losses, if any, and may be converted into
paid-in capital in proportion to the existing equity interest of investors.
(e) Exchange reserve
The exchange reserve comprises all foreign exchange differences arising from the
translation of financial statements of foreign operations. The reserve is dealt with in
accordance with the accounting policies set out in note 3(t)(ii).
(f) Fair value reserve
The fair value reserve comprises the cumulative net change in the fair value of available-
for-sale securities held at the end of the reporting period and is dealt with in accordance
with the accounting policies in notes 3(f) and 3(m).
(g) Other reserves
Other reserves comprise the following:
share of the reserves movement of the Group’s associates and joint ventures other
than profit or loss and other comprehensive income;
the accumulated changes in equity during the periods arising from transactions with
equity holders in their capacity as equity holders; and
remeasurement of defined benefit obligations.
(h) Capital management
The Group’s Finance Committee under the board of directors is responsible for capital
management. The primary objectives when managing capital are to safeguard the
Group’s ability to continue as a going concern.
Treasury management department of the Group issues capital management policies that
are in compliance with the strategies set by the Finance Committee, and actively and
regularly reviews and manages the Group’s capital structure to maintain a balance
between the higher returns that might be possible with higher levels of borrowings and
advantages and security afforded by a sound capital position, and makes adjustments to
the capital structure in light of changes in economic conditions.
F-137
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
67
26 Capital, reserves and dividends (continued)
(h) Capital management (continued)
During 2014, the Group’s strategy, which was unchanged from 2013, was to maintain an
interest-bearing debt-to-total equity and interest-bearing debt ratio at a range of levels to
support the operations and development of the Group’s business in the long run. In order
to maintain or adjust the ratio, the Group may increase capital, request new loans, or raise
new debt financing.
The interest-bearing debt-to-total equity and interest-bearing debt ratio at 31 December
2014 and 2013 is as follows:
Note 2014 2013
RMB’000 RMB’000
Current liabilities
Interest-bearing loans and borrowings 27 10,529,847 3,043,280
Non-current liabilities
Interest-bearing loans and borrowings 27 17,576,885 19,989,460
Total interest-bearing debt 28,106,732 23,032,740
Total equity 99,985,077 86,266,116
Total interest-bearing debt 28,106,732 23,032,740
Total equity and interest-bearing debt 128,091,809 109,298,856
Interest-bearing debt-to-total equity
and interest-bearing debt ratio 21.94% 21.07%
Except for the compliance of certain financial covenants for maintaining the Group’s
banking facilities and borrowings, the Group is not subject to any externally imposed
capital requirements. The Group complied with the financial covenants attached to
borrowings as at 31 December 2014.
F-138
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
68
27 Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest-
bearing loans and borrowings. Information about the Group’s exposure to interest rate
and currency risk is disclosed in note 32.
2014 2013
RMB’000 RMB’000
Short-term loans and borrowings:
- Intra-group guaranteed 1,890,679 2,022,164
- Unsecured - 24,829
1,890,679 2,046,993 ------------------ ------------------ Long-term loans and borrowings:
- Intra-group guaranteed 22,253,600 18,350,848
- Unsecured 1,381,701 1,643,560
- Corporate bond 2,580,752 991,339
26,216,053 20,985,747 ------------------ ------------------
28,106,732 23,032,740
Non-current portion 17,576,885 19,989,460
Current portion 10,529,847 3,043,280
28,106,732 23,032,740
F-139
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
69
27 Interest-bearing loans and borrowings (continued)
Terms and repayment schedule
Terms and conditions of outstanding loans and borrowings are as follows:
Total 1 year or less 1 to 5 years over 5 years
RMB’000 RMB’000 RMB’000 RMB’000
Intra-group guaranteed bank loans:
Brazil Real - fixed at 11.09% p.a. 43,367 43,367 - -
RMB - variable at 5.90%~6.55% p.a. 1,556,631 225,698 626,221 704,712
Ethiopian Birr - fixed at 9.50% p.a. 825 825 - -
Euro (“EUR”)
- variable at 1.40% ~ 1.71% p.a. 3,563,628 791,626 2,772,002 -
Indian rupee
- variable at 9.50% ~ 9.75% p.a. 842,171 842,171 - -
Kazakhstan Tenge
- fixed at 7.00%~8.50% p.a. 187,403 125,385 62,018 -
Philippines Peso - variable at 3.70% p.a. 18,150 18,150 - -
United States dollar (“USD”)
- variable at 1.63%~2.64% p.a. 15,074,014 4,317,190 10,756,824 -
- fixed at 4.33% p.a. 2,788,110 2,788,110 - -
New Venezuelan Bolivar
- variable at 14.00% p.a. 11,774 11,774 - -
Vietnam Dong
- variable at 6.68%~8.00% p.a. 58,206 58,206 - -
24,144,279 9,222,502 14,217,065 704,712 --------------- -------------- -------------- --------------
Unsecured bank loan:
RMB - variable at 5.90% ~ 6.55% p.a. 1,381,701 309,526 643,184 428,991 --------------- -------------- -------------- --------------
Corporate bond:
RMB - fixed at 5.30% p.a. 997,819 997,819 - -
RMB - fixed at 4.55% p.a. 1,582,933 - 1,582,933 -
2,580,752 997,819 1,582,933 - --------------- --------------- -------------- --------------
28,106,732 10,529,847 16,443,182 1,133,703
The carrying amount of the above loans and borrowings approximates to their fair value.
F-140
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
70
27 Interest-bearing loans and borrowings (continued)
Terms and repayment schedule (continued)
Certain of the Group’s banking facilities are subject to the fulfilment of covenants
relating to certain of the borrower’s statement of financial position ratios, as are
commonly found in lending agreements with financial institutions. If the Group were to
breach the covenants, the draw down facilities would become payable on demand. The
Group regularly monitors its compliance with these covenants. Further details of the
Group’s management of liquidity risk are set out in note 32(b). As at 31 December 2014,
none of the covenants relating to draw down facilities had been breached (2013: nil).
Corporate bond
On 17 September 2014, Proven Honour Capital Limited, a wholly-owned subsidiary of
the Company, issued a corporate bond with a principal amount of RMB1,600,000,000
with three years maturity at an annual interest rate of 4.55%. This corporate bond is fully
guaranteed by the Company.
On 11 May 2012, Proven Honour Capital Limited, a wholly-owned subsidiary of the
Company, issued a corporate bond with a principal amount of RMB1,000,000,000 with
three years maturity at an annual interest rate of 5.30%. This corporate bond is fully
guaranteed by the Company.
28 Trade and bills payable
Note 2014 2013
RMB’000 RMB’000
Trade payables
Trade payables due to related parties 36 857,422 673,890
Trade payables due to third parties 44,286,522 30,616,163
45,143,944 31,290,053 ------------------ ------------------
Bills payable
Bank acceptance bills 754,606 377,876
Letter of credit payables - 312,551
754,606 690,427 ------------------ ------------------
45,898,550 31,980,480
F-141
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
71
29 Other payables
Note 2014 2013
RMB’000 RMB’000
Restated
(Note 40)
Interest payable 661,859 633,926
Advances received 33,474,740 25,582,315
Accrued expenses
- Staff related 29,111,179 17,819,536
- Supplies related 17,202,903 11,777,394
Other taxes payable 7,478,163 7,823,759
Purchase of property, plant and equipment 2,185,172 2,053,212
Other payables due to third parties 16,075,395 14,606,938
Other payables due to related parties 36 2,628,622 150,064
108,818,033 80,447,144
30 Long-term employee benefits
2014 2013
RMB’000 RMB’000
Defined benefit obligations 9,534,531 9,608,257
Other long-term employee benefits 196,802 -
9,731,333 9,608,257
Defined benefit post-employment plan
Effective from 8 October 2007, the Group launched a defined benefit post-employment
plan to improve the benefits available to employees. The plan covers employees
employed under the group entities incorporated in the PRC. Under the plan, a lump sum
benefit calculated based on salary and number of service years is payable to the
employees upon termination of service. The plan is managed by the Group. There is no
separate fund set up for the plan.
F-142
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
72
30 Long-term employee benefits (continued)
Defined benefit post-employment plan (continued)
The plan exposes the Group to actuarial risks, such as interest rate risk and longevity risk.
Information about the plan is disclosed below:
(i) The amounts recognised in the consolidated statement of financial position are as
follows:
2014 2013
RMB’000 RMB’000
Present value of obligations 9,534,531 9,608,257
(ii) Movement in the present value of the defined benefit obligations
2014 2013
RMB’000 RMB’000
At 1 January 9,608,257 9,686,076
Remeasurements: actuarial losses 195,410 719,613
9,803,667 10,405,689 ------------------ ------------------
Benefits paid by the plan (2,645,906) (2,604,363)
Past service credit resulting from a plan
amendment - (1,169,118)
Current service cost 1,917,625 2,506,912
Interest cost 458,365 469,007
Transfer from related parties 780 130
At 31 December 9,534,531 9,608,257
F-143
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
73
30 Long-term employee benefits (continued)
Defined benefit post-employment plan (continued)
(iii) Amounts recognised in the consolidated statement of profit or loss and other
comprehensive income are as follows:
Note 2014 2013
RMB’000 RMB’000
Current service cost 8 1,917,625 2,506,912
Past service credit 8 - (1,169,118)
Interest cost 9 458,365 469,007
Total amounts recognised in profit or loss 2,375,990 1,806,801
Actuarial losses recognised in other
comprehensive income 11(a) 195,410 719,613 ------------------ ------------------
Total defined benefit costs 2,571,400 2,526,414
(iv) Significant actuarial assumptions (expressed as weighted averages) and sensitivity
analysis are as follows:
2014 2013
Discount rate 4.48% 4.90%
Future salary increases 5.00% 5.00%
The below analysis shows how the defined benefit obligations would have
increased (decreased) as a result of 1% change in the significant actuarial
assumptions:
Increase in 1% Decrease in 1%
2014 2013 2014 2013
RMB’000 RMB’000 RMB’000 RMB’000
Discount rate (201,788) (202,758) 211,057 211,617
Future salary increases 60,198 45,939 (58,077) (44,435)
The above sensitivity analysis is based on the assumption that changes in actuarial
assumptions are not correlated and therefore it does not take into account the
correlations between the actuarial assumptions.
F-144
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
74
30 Long-term employee benefits (continued)
Other long-term employee benefits
Other long-term employee benefits are mainly the long-term benefits payable under the
TUP (note 8).
31 Provisions
Note 2014 2013
RMB’000 RMB’000
Provision for warranties (b) 3,661,696 2,962,744
Other provisions (c) 4,647,277 2,536,570
8,308,973 5,499,314
Non-current portion 964,028 781,688
Current portion 7,344,945 4,717,626
8,308,973 5,499,314
(a) Movement in provisions during the year is shown as below:
Provision for Other
warranties provisions Total
RMB’000 RMB’000 RMB’000
At 1 January 2014 2,962,744 2,536,570 5,499,314
Provisions made during the year 3,891,753 3,347,970 7,239,723
Provisions utilised during the year (3,192,801) (1,237,263) (4,430,064)
At 31 December 2014 3,661,696 4,647,277 8,308,973
(b) Provision for warranties
The provision for warranties relates primarily to equipment sold during the year. The
provision is determined based on estimates made from historical warranty data associated
with similar products and anticipated rates of warranty claims for the products. The
Group expects to settle the majority of the liability within the next twelve months.
(c) Other provisions
Other provisions are mainly for onerous contracts, outstanding litigations and claims.
F-145
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
75
32 Financial risk management and fair values of financial instruments
Exposure to credit, liquidity, interest rate and currency risk arises in the normal course of
the Group’s business. The Group’s exposure to these risks and the financial risk
management policies and practices used by the Group to manage these risks are
described below.
(a) Credit risk
The Group’s credit risk is primarily attributable to cash and cash equivalents and trade
and other receivables. Management has a credit policy in place and the exposures to these
credit risks are monitored on an ongoing basis.
The majority of the Group’s cash and cash equivalents are deposited with banks or
financial institutions, which are with high credit-ratings assigned by international credit-
rating agencies.
For investments in wealth management products, the Company generally requires the
issuers of the wealth management products to be of investment grade, with the objective
of minimizing the potential risk of principal loss.
In respect of trade and other receivables, the Group regularly performs assessment of
creditworthiness on all customers for the Group’s commercial transactions to monitor the
risk arising from customers’ inability or unwillingness to make full and timely payments.
These evaluations focus on the customer’s current ability to pay, historical payment
records and take into account information specific to the customer as well as pertaining to
the country and economic environment in which the customer operates.
The credit period of trade receivables is agreed and reviewed for each individually
significant project. The Group has a department to monitor and control the collection of
past due trade receivables. The Group will consider allowance for debts due from
customers with poor credit records. Further transactions with these customers are
carefully analysed and authorised by senior management of the Group. If necessary, the
Group requires collateral or other credit enhancements from customers, which include
third-party guarantees, fixed-asset pledges, performance index monitoring etc. The value
and efficacy of collateral or other credit enhancements will be assessed at the project
review phase and reviewed on a regular basis during the whole business cycle.
F-146
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
76
32 Financial risk management and fair values of financial instruments (continued)
(a) Credit risk (continued)
The Group provides funding to customers in certain limited situations. These funding are
subject to credit analysis for evaluation of associated credit risk and shall be approved by
senior management of the Group. For significant funding provided, covenants are
contained in the arrangements to protect the Group against credit deterioration of the
customers. In certain circumstances, the Group would consider transferring the credit risk
to third parties. The credit risk exposure of these funding is monitored on an ongoing
basis and provision for impairment losses is made where the prospect of recovery is
remote.
In most cases, the Group’s exposure to credit risk is influenced mainly by the individual
characteristics of each customer rather than the country in which the customers operate
and therefore significant concentrations of credit risk primarily arise when the Group has
significant exposure to individual customers. At the end of the reporting period,
approximately 22% (2013: 17%) of total trade receivables was due from one customer of
the Group.
Further quantitative disclosures in respect of the Group’s exposure to credit risk arising
from trade and other receivables are set out in note 22 and note 23.
(b) Liquidity risk
The Group has established a treasury management system for cash flow planning,
budgeting, and forecasting to regularly monitor current and expected liquidity
requirements, to ensure that it maintains sufficient reserves of cash and readily realisable
marketable securities and adequate committed lines of funding from major financial
institutions to meet its liquidity requirements in the short and longer term. A Financial
Risk Control Center and global liquidity risk monitoring team was also established
during the year to help with the Group’s global cash and liquidity management.
F-147
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
77
32 Financial risk management and fair values of financial instruments (continued)
(b) Liquidity risk (continued)
The following tables show the remaining contractual maturities at the end of the
reporting period of the Group’s non-derivative financial liabilities, which are based on
contractual undiscounted cash flows (including interest payments computed using
contractual rates or, if floating, based on rates current at the end of the reporting period)
and the earliest date the Group can be required to pay:
2014
Contractual undiscounted cash outflow
More than
Within 1 year but
Carrying 1 year or less than More than
amount Total on demand 5 years 5 years
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Interest-bearing loans and
borrowings 28,106,732 29,735,188 11,168,138 17,279,925 1,287,125
Trade and bills payable 45,898,550 45,898,550 45,898,550 - -
Other payables, excluding other
taxes payable, staff benefits
payable, advances received
and other provisions 36,114,752 36,114,752 36,114,752 - -
110,120,034 111,748,490 93,181,440 17,279,925 1,287,125
2013
Contractual undiscounted cash outflow
More than
Within 1 year but
Carrying 1 year or less than More than
amount Total on demand 5 years 5 years
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Interest-bearing loans and
borrowings 23,032,740 24,416,304 3,640,837 20,166,912 608,555
Trade and bills payable 31,980,480 31,980,480 31,980,480 - -
Other payables, excluding other
taxes payable, staff benefits
payable, advances received
and other provisions 27,587,255 27,587,255 27,587,255 - -
82,600,475 83,984,039 63,208,572 20,166,912 608,555
F-148
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
78
32 Financial risk management and fair values of financial instruments (continued)
(c) Interest rate risk
The Group’s interest rate risk arises primarily from non-current interest-bearing loans
and borrowings issued. Borrowings issued at variable rates and at fixed rates expose the
Group to cash flow interest rate risk and fair value interest rate risk respectively. The
Group determines the ratio of fixed-rate and variable-rate instruments according to the
market environment, and maintains an appropriate combination of fixed-rate and
variable-rate instruments by reviewing and monitoring it on a regular basis. The Group’s
interest rate profile as monitored by management is set out in (i) below.
(i) Interest rate profile
The following table details the interest rate profile of the Group’s net non-current
borrowings as at 31 December:
2014 2013
Effective Effective
interest rate interest rate
% RMB’000 % RMB’000
Net fixed rate non-current borrowings:
Interest-bearing loans and borrowings 5.09 1,644,951 4.59 3,721,822
Net variable rate non-current borrowings:
Interest-bearing loans and borrowings 2.33 15,931,934 2.41 16,267,638
Trade and other receivables 0.80 (2,630,584) - -
13,301,350 16,267,638 ----------- -----------
Total net non-current borrowings 14,946,301 19,989,460
Net fixed rate non-current borrowings as a
percentage of total net non-current borrowings 11.01% 18.62%
F-149
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
79
32 Financial risk management and fair values of financial instruments (continued)
(c) Interest rate risk (continued)
(ii) Sensitivity analysis
As at 31 December 2014, it is estimated that a general increase / decrease of 50 basis
points in interest rate, with all other variables held constant, would have decreased /
increased the Group’s profit after tax and retained earnings by approximately
RMB65,773,000 (2013: RMB81,468,000).
The sensitivity analysis above indicates the instantaneous change in the Group’s profit
after tax and retained earnings that would arise assuming that the change in interest rates
had occurred at the end of the reporting period and had been applied to re-measure those
financial instruments held by the Group which expose the Group to fair value interest rate
risk at the end of the reporting period. In respect of the exposure to cash flow interest rate
risk arising from variable rate non-derivative instruments held by the Group at the end of
the reporting period, the impact on the Group’s profit after tax and retained earnings is
estimated as an annualised impact on interest expense or income of such a change in
interest rates. The analysis is performed on the same basis for 2013.
(d) Currency risk
The Group conducts business globally and is exposed to currency risk primarily through
external and intra-group sales and purchases, which give rise to receivables, payables and
cash and cash equivalent balances that are denominated in a foreign currency, i.e. a
currency other than the functional currency of the operations to which the transactions
relate. The functional currency of the Group and the individual subsidiaries that compose
the Group may be different. The currencies giving rise to this risk are primarily USD,
EUR and Hong Kong dollar (“HKD”).
The Group has established a currency exposure management system that mitigates
currency risk through various foreign exchange measures including:
matching currencies between procurements and sales transactions.
balancing cash inflows and outflows of foreign currencies.
selecting appropriate financial measures which are in line with the Company’s risk
management policies and strategies.
monitoring foreign currencies with heightened remittance risk.
F-150
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
80
32 Financial risk management and fair values of financial instruments (continued)
(d) Currency risk (continued)
(i) Exposure to currency risk
The following table details the Group’s exposure at the end of the reporting period to
currency risk arising from recognised monetary assets and liabilities denominated in a
currency other than the functional currency of the entity to which they relate. These
financial instruments held by the Group which expose the Group to foreign currency risk
at the end of the reporting period, include inter-company payables and receivables within
the Group which are denominated in a currency other than the functional currencies of
the lender or the borrower.
Exposure to foreign currencies (expressed in RMB)
2014 2013
USD EUR HKD USD EUR HKD
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade and bills receivable 81,901,000 11,361,151 4 90,281,149 12,427,986 143
Other receivables 24,664,304 3,375,376 1,346 22,865,810 4,027,776 10,574
Cash and cash equivalents 10,063,045 2,323,690 - 12,996,287 767,848 -
Interest-bearing loans and
borrowings (28,936,885) (5,032,134) - (29,840,041) (5,230,928) -
Trade and bills payable (49,651,312) (4,727,475) (4,154,212) (56,511,642) (6,807,680) (2,655,306)
Other payables (13,102,319) (2,420,876) (62,892) (7,657,923) (1,238,930) (3,524)
Total exposure 24,937,833 4,879,732 (4,215,754) 32,133,640 3,946,072 (2,648,113)
F-151
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
81
32 Financial risk management and fair values of financial instruments (continued)
(d) Currency risk (continued)
(ii) Sensitivity analysis
The following table indicates the instantaneous change in the Group’s profit after tax and
retained earnings that would arise if foreign exchange rates to which the Group has
significant exposure at the end of the reporting period had changed at that date, assuming
all other risk variables remained constant.
2014 2013
Increase / Increase /
Increase / (decrease) on Increase / (decrease) on
(decrease) profit after (decrease) profit after
in foreign tax and in foreign tax and
exchange retained exchange retained
rates earnings rates earnings
RMB’000 RMB’000
USD 5% (577,840) 5% (1,147,494)
(5%) 577,840 (5%) 1,147,494
EUR 5% (173,131) 5% (171,619)
(5%) 173,131 (5%) 171,619
HKD 5% 349,713 5% 184,088
(5%) (349,713) (5%) (184,088)
Results of the analysis as presented in the above table represent an aggregation of the
instantaneous effects on each of the group entities’ profit after tax and retained earnings
measured in the respective functional currencies, translated into RMB at the exchange
rate ruling at the end of the reporting period for presentation purposes.
The sensitivity analysis assumes that the change in foreign exchange rates had been
applied to re-measure those financial instruments held by the Group which expose the
Group to foreign currency risk at the end of the reporting period. The analysis excludes
differences that would result from the translation of financial statements of foreign
operations into the Group’s presentation currency. The analysis is performed on the same
basis for 2013.
F-152
Hu
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F-153
Hu
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& H
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Ltd
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F-154
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
84
32 Financial risk management and fair values of financial instruments (continued)
(e) Fair value measurement (continued)
(ii) Financial instruments measured at fair value
The following table presents the carrying value of the Group’s financial instruments
measured at fair value at the end of the reporting period on a recurring basis, categorised into
the three-level fair value hierarchy as defined in IFRS 13, Fair value measurement. The level
into which a fair value measurement is classified is determined with reference to the
observability and significance of the inputs used in the valuation technique as follows:
Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted
quoted prices in active markets for identical assets or liabilities at the measurement
date;
Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs
which fail to meet Level 1, and not using significant unobservable inputs. Unobservable
inputs are inputs for which market data are not available;
Level 3 valuations: Fair value measured using significant unobservable inputs.
Fair value at Fair value measurements as at Fair value at Fair value measurements as at
31 December 31 December 2014 categorised into 31December 31 December 2013 categorised into
2014 Level 1 Level 2 Level 3 2013 Level 1 Level 2 Level 3 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Recurring fair value
measurements
Assets:
Available-for-sale financial
assets: - Listed equity securities 3,678 3,678 - - 118,047 118,047 - -
- Debt securities 664,432 664,432 - - 633 633 - -
- Wealth management products 8,626,268 - 8,626,268 - 8,544,966 - 8,544,966 -
Financial assets at fair value through profit or loss:
-held-for-trading debt
securities 30,388 30,388 - - - - - -
Valuation techniques and inputs used in Level 2 fair value measurements
The fair value of wealth management products in Level 2 is the estimated amount that the
Group would receive upon expiry or termination at the end of the reporting period, taking
into account the related current market interest rates.
During the year ended 31 December 2014 and 2013, there were no transfers among
instruments in Level 1, Level 2 and Level 3.
F-155
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
85
32 Financial risk management and fair values of financial instruments (continued)
(e) Fair value measurement (continued)
(iii) Fair values of financial instruments carried at other than fair value
The carrying amounts of the Group’s financial instruments carried at cost or amortised cost
are not materially different from their fair values as at 31 December 2014 and 2013 except
for the following financial instruments:
Fair value measurements
as at 31 December 2014
categorised into
Carrying Fair
amount at 31 value at 31
December 2014 December 2014 Level 1 Level 2 Level 3
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Non-current fixed rate
trade receivables 131,111 115,705 - - 115,705
Non-current fixed rate
other receivables 52,272 45,928 - - 45,928
Non-current fixed rate
interest - bearing
loans and borrowings (1,644,951) (1,576,067) - - (1,576,067)
Fair value measurements
as at 31 December 2013
categorised into
Carrying Fair
amount at 31 value at 31
December 2013 December 2013 Level 1 Level 2 Level 3
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Non-current fixed rate
trade receivables 335,603 284,089 - - 284,089
Non-current fixed rate
other receivables 13,906 10,911 - - 10,911
Non-current fixed rate
interest - bearing
loans and borrowings (3,721,822) (3,468,628) - - (3,468,628)
Valuation techniques and inputs used in Level 3 fair value measurements
The fair values of the non-current fixed rate trade receivables, non-current fixed rate other
receivables and non-current fixed rate interest-bearing loans and borrowings are estimated as
being the present values of future cash flows, discounted at interest rates based on the
government yield curve as at the end of the reporting period plus an adequate constant credit
spread, adjusted for the Group’s own credit risk.
F-156
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
86
33 Operating leases
(a) As lessee
As at 31 December 2014 and 2013, the total future minimum lease payments under non-
cancellable operating leases are payable as follows:
2014 2013
RMB’000 RMB’000
Within 1 year 1,471,093 1,493,422
After 1 year but within 5 years 1,934,560 2,140,545
After 5 years 341,099 480,730
3,746,752 4,114,697
The Group leases a number of warehouses, factory facilities, office premises and staff
apartments under operating leases. The leases typically run for an initial period of one to
five years. None of the leases includes contingent rentals.
During the year ended 31 December 2014, RMB3,244,985,000 was recognised as an
expense in the consolidated statement of profit or loss in respect of operating leases
(2013: RMB3,457,831,000).
(b) As lessor
The Group leases out certain of its properties under operating leases (see note 5 and note
15). As at 31 December 2014 and 2013, the Group’s total future minimum lease
payments under non-cancellable operating leases are receivable as follows:
2014 2013
RMB’000 RMB’000
Within 1 year 18,397 22,587
After 1 year but within 5 years 60,849 1,434
79,246 24,021
During the year ended 31 December 2014, RMB81,604,000 was recognised as rental
income in the consolidated statement of profit or loss (2013: RMB77,201,000).
F-157
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
87
34 Capital commitments
(a) Acquisition and construction of buildings
Capital commitments of the Group in respect of acquisition and construction of buildings
outstanding at 31 December 2014 and 2013 not provided for in the consolidated financial
statements were as follows:
2014 2013
RMB’000 RMB’000
Contracted for 3,496,027 3,378,248
Authorised but not contracted for 1,662,973 2,944,379
5,159,000 6,322,627
(b) Other capital commitments
Other contracted capital commitments outstanding at 31 December 2014 and 2013 not
provided for in the consolidated financial statements were as follows:
2014 2013
RMB’000 RMB’000
Investment commitment 9,288 -
F-158
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
88
35 Contingencies
(i) In July 2011, InterDigital Corporation (“IDC”) filed a complaint with the United States
International Trade Commission (the “USITC” or “Commission”) and the United States
District Court for the District of Delaware against Huawei Technologies Co., Ltd.
(“Huawei Tech”) and Futurewei Technologies Inc. (“Futurewei”), both wholly-owned
subsidiaries of the Company. The complaint alleged that sales of imported 3G wireless
devices by the said subsidiaries within the United States had infringed IDC’s 3G wireless
patents and requested for issuance of exclusion order and cease and desist order in
relation to the accused 3G wireless devices concerned (“the first complaint”).
In December 2011, Huawei Tech filed a complaint against IDC in the PRC for violation
of the fair, reasonable, and non-discriminatory (“FRAND”) policies and the PRC’s Anti-
Monopoly Law. In June 2012, Huawei Tech filed another complaint with the European
Commission (the “EC”) to request an investigation into the licensing fees requested by
IDC, which it deemed exploitative, discriminatory, and in violation of the FRAND
policies as well as the EC’s antitrust law.
On 2 January 2013, IDC filed another two complaints with the USITC and the United
States District Court for the District of Delaware against Huawei Tech, Futurewei, and
Huawei Device USA Inc. (“USA Device”), another wholly-owned subsidiary of the
Company. The complaints further alleged that the sales of certain 3G and 4G wireless
devices sold by the said subsidiaries within the United States had infringed three of
IDC’s other patents.
F-159
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
89
35 Contingencies (continued)
(i) (continued)
On 4 February 2013, the Shenzhen Intermediate People’s Court ruled that IDC had
violated the PRC’s Anti-Monopoly Law and ordered IDC to compensate the Group for
damages of RMB20 million. The Court also ruled that the royalty rates licenses to
Huawei Tech for IDC’s Chinese essential standard patents in wireless communication
should not exceed 0.019% of the actual sales prices of Huawei Tech’s wireless devices.
On 11 March 2013, IDC filed appeals to the Guangdong Higher People’s Court in respect
of the rulings made by the Shenzhen Intermediate People’s Court. On 25 October 2013,
the Guangdong Higher People’s Court upheld the Shenzhen Intermediate People’s
Court’s ruling which is the final ruling.
On 28 June 2013 and 19 December 2013, the USITC ruled in favor of Huawei Tech,
Futurewei and USA Device in respect of the first complaint in the initial determination
and the final determination, respectively.
On 23 December 2013, Huawei Tech, Futurewei and USA Device reached a settlement
agreement with IDC to withdraw or dismiss all the ongoing legal actions against each
other. Under the settlement agreement, the parties will solve their dispute through
arbitration.
On 12 January 2015, the arbitration hearing was held in the United States to solve the
dispute between Huawei and InterDigital. The arbitration award is still pending.
At this stage, the Group is unable to predict the outcome of the arbitration, or reasonably
estimate a range of possible loss, if any, given the current pending status of the
arbitration.
(ii) On 23 May 2012, Flashpoint Technology Inc. (“Flashpoint”) filed a complaint with the
USITC, requesting the Commission to commence an investigation under Section 337 of
the Tariff Act of 1930 into certain electronic imaging devices manufactured by four
alleged infringing companies and their affiliates by reason of patent infringement and
requested for issuance of an exclusion order and cease and desist order in relation to the
electronic imaging devices concerned. Huawei Tech and Futurewei were named as
respondents. On 2 August 2012, the Administrative Law Judge granted a joint motion to
substitute Huawei Device Co., Ltd. (“Huawei Device”) and USA Device for Huawei
Tech and Futurewei. Flashpoint also filed another complaint before the United States
District Court for the District of Delaware for the same reason against Huawei Device
and USA Device. The legal action before District Court of Delaware was stayed.
F-160
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
90
35 Contingencies (continued)
(ii) (continued)
On 30 September 2013, the Administrative Law Judge of the USITC issued an initial
determination in respect of Flashpoint’s complaint with USITC that Huawei Device and
USA Device did not infringe the asserted patents.
On March 14, 2014, the USITC issued the final determination deciding that Huawei
Device and USA Device did not infringe the asserted patents. Flashpoint did not appeal
to such final determination, and the investigation terminated in the Group’s favor.
Flashpoint subsequently also dismissed its infringement assertions against Huawei
Device and USA Device before the United States District Court for the District of
Delaware. The Group could reasonably conclude that this litigation is terminated, and
there is no possible loss to the Group.
(iii) On 24 July 2012, Technology Properties Limited LLC (“TPL”) filed a complaint with the
USITC, requesting the Commission to commence an investigation under Section 337 of
the Tariff Act of 1930 into certain wireless consumer electronics devices and components
manufactured by thirteen companies and their affiliates by reason of alleged patent
infringement and requested for issuance of an exclusion order and cease and desist order
in relation to the electronic products concerned. Huawei Tech was named as one of the
thirteen companies. On 21 August 2012, the USITC decided to institute Section 337
investigation in relation to the electronic products concerned. TPL also filed another
complaint before the United States District Court for the Northern District of California
for the same reason. On 6 September 2013, the Administrative Law Judge of the USITC
issued an initial determination that the Group did not infringe the asserted patent. On 19
February 2014, the USITC issued a final determination that the Group did not infringe
the asserted patent. TPL did not appeal the final determination within the statutory
period, as a result, the USITC investigation formally terminated. With the termination of
the investigation, the suit before the United States District Court for the Northern District
of California was reopened. Given the fact that the suit in the district court remains in an
early stage, the Group is unable to predict the outcome of the suit, or reasonably estimate
a range of possible loss if any.
F-161
Hu
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stm
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& H
old
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Ltd
.
Co
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F-162
Hu
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& H
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Ltd
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-
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- -
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en D
igit
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edia
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-
- -
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-
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ervic
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om
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imit
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- -
- -
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1
,55
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,42
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51
F-163
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
93
36 Related parties (continued)
Balances with associates and joint ventures
31 December 2014 (RMB’000)
Trade Other Trade Other
receivables receivables payables payables
TD Tech 477,537 3,261,334 169,458 2,612,647
Huawei Marine 347,926 14,907 388,869 15,975
Tianwen Digital Media 1,650 - 229 -
Chinasoft International Technology
Services Ltd. - - 154,074 -
iSoftStone Technology Service
Company Limited - - 144,792 -
827,113 3,276,241 857,422 2,628,622
31 December 2013 (RMB’000)
Trade Other Trade Other
receivables receivables payables payables
Restated Restated
(Note 40) (Note 40)
TD Tech 173,184 342,990 92,518 87,102
Huawei Marine 192,603 10,697 226,266 61,721
CD Investment (note a) 5,276 - 164,985 1,241
Tianwen Digital Media 1,707 - 200 -
Chinasoft International Technology
Services Ltd. - - 36,427 -
iSoftStone Technology Service
Company Limited - - 153,494 -
372,770 353,687 673,890 150,064
Note a: As disclosed in note 18, the Company acquired the 51% equity interests
previously held by a third party in CD investment in March 2014 and CD
investment became the wholly-owned subsidiary of the Company.
37 Group enterprises
(a) Parent and ultimate controlling party
The Group’s ultimate controlling party is the Union.
F-164
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
94
37 Group enterprises (continued)
(b) Major subsidiaries
Place of
incorporation Proportion of
Name of subsidiary and business ownership interest
2014 2013 Principal activity
Huawei Technologies Co., Ltd. PRC 100% 100% Development, manufacture
and sale of telecommunication
products and the technical
support & maintenance
of electrical equipment
and spare parts
Huawei Software Technologies PRC 100% 100% Development, manufacture
Co., Ltd. and sale of software and
new products in mobile
communication area and
rendering of related services
Shanghai Huawei Technologies PRC 100% 100% Development, sale,
Co., Ltd. consultancy service
and after-sale service of
telecommunication equipment
Beijing Huawei Digital Technologies PRC 100% 100% Development, sale, and
Co., Ltd technical support of mobile
communication products, import
and export of goods and
techniques
Shenzhen Huawei Technologies PRC 100% 100% Development, manufacture,
Software Co., Ltd. sale and provide service
of communication software
and related products
HUAWEI TECHNICAL SERVICE PRC 100% 100% Installation, technology
CO., LTD. consultancy service and
maintenance of
telecommunication equipment
and auxiliary products
Huawei Machine Co., Ltd. PRC 100% 100% Development, manufacture and
sale of telecommunication
products; offering of
technology services
HiSilicon Technologies PRC 100% 100% Design, development and
Co., Ltd. sale of semiconductors
of telecommunication products
F-165
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
95
37 Group enterprises (continued)
(b) Major subsidiaries (continued)
Place of
incorporation Proportion of
Name of subsidiary and business ownership interest
2014 2013 Principal activity
HiSilicon Optoelectronics PRC 100% 100% Design, development,
Co., Ltd. manufacture, sale and
after-sale services of
optoelectronic technology
and products in
information technology area,
agency of relevant
optoelectronic products,
import and export of products
related to information technology
and optical communication
and auxiliary parts
Huawei Device (Dongguan) PRC 100% 100% Design, development,
Co., Ltd. manufacture and sale of
telecommunication and
information products and
auxiliary parts ,and provision of
consulting and after-sale services;
design, development,
manufacture and sale of
satellite TV receiving antenna,
tuners and digital satellite
TV receiver; import and export
business in compliance with
relevant laws and regulations
Huawei Tech. Investment Hong Kong 100% 100% Trading of imported materials,
Co., Limited sale of overseas device
(exclude the United States)
and overseas machineries
Huawei Device Co., Ltd. PRC 100% 100% Development, manufacture and
sale of mobile communication
products and electrical parts
Huawei International Pte. Ltd. Singapore 100% 100% Trading of
telecommunication equipment
Huawei Technologies Netherlands 100% 100% Investor of overseas subsidiaries
Coöperatief U.A.
PT. Huawei Tech Investment Indonesia 100% 100% Trading of
telecommunication equipment
F-166
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
96
37 Group enterprises (continued)
(b) Major subsidiaries (continued)
Place of
incorporation Proportion of
Name of subsidiary and business ownership interest
2014 2013 Principal activity
Huawei Technologies Japan K.K. Japan 100% 100% Design, development,
manufacture and sale of
telecommunication and
information products, provide
auxiliary products and services
Huawei Device (Hong Kong) Hong Kong 100% 100% Sale and maintenance of
Co., Limited electrical equipment and
mobile communication products
Huawei Technologies Germany 100% 100% The trade and distribution of
Deutschland GmbH telecommunication equipment
products and all related
activities and services
Futurewei Technologies, Inc. United States 100% 100% Technology research
and development
Proven Honour Capital Limited British Virgin 100% 100% Financing
Islands
F-167
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
97
37 Group enterprises (continued)
(c) Acquisition of subsidiaries
(i) Neul Limited
On 16 September 2014, Huawei Technologies Coöperatief U.A., a wholly-owned
subsidiary of the Company, acquired 100% equity interest in Neul Limited (“Neul”) from
a third party, for a consideration of GBP14,504,000 (equivalent to RMB142,381,000) in
cash.
Neul is based in Cambridge, UK and was incorporated in September 2010. Nuel develops
and supplies technology to allow network operators to provide a scalable, low power
network service to connect small low power devices to their online digital presence in the
Cloud. The acquisition of Neul gives the Group improved access to the market in the
“Internet of Things”. The major asset item recognised at the date of acquisition is the
intangible asset as disclosed in note 14; and the goodwill arising from the acquisition is
disclosed in note 13.
(ii) CD Investment
As disclosed in note 18, the Company acquired the 51% equity interests in CD
investment (previously a joint venture of the Group) from a third party in March 2014
and CD Investment became a wholly-owned subsidiary of the Company. At the date of
acquisition, CD Investment had no significant business transactions other than the
holding of the ownership titles of the property, plant and equipment that are used by other
group entities. Therefore, CD Investment’s operation does not constitute a business as
defined under IFRS 3, Business Combination. Accordingly, the acquisition is accounted
for as purchase of assets. The property, plant and equipment items and long-term
leasehold prepayments acquired from the transaction are disclosed in note 15 and note
16, respectively.
F-168
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
98
38 Accounting judgments and estimates
Sources of estimation uncertainty
Notes 13, 19, 24, 30 and 32(e) contain information about the assumptions and their risk
factors relating to valuation of goodwill impairment, defined benefit obligations and
financial instruments. Other key sources of estimation uncertainty are as follows:
(a) Revenue recognition
Revenue from sale of goods and provision of services are recognised when the criteria set
out in note 3(r) are met. Managerial judgment is applied regarding, among other aspects,
conformance with acceptance criteria and if transfer of risks and rewards to the customer
has taken place to determine if revenue should be recognised in the current year and the
customer credit standing to assess whether payment is likely or not to justify revenue
recognition. Revenues may materially change if management’s assessment of such
criteria was determined to be inaccurate.
(b) Impairment of receivables
As described in note 32(a), credit risks of customers are regularly assessed with reference
to the estimated future cash flow of an individual debtor or a portfolio of debtors and
changes in the financial condition that have an adverse effect on the debtor, and
allowances are recorded for estimated losses. If the financial conditions of customers
were to deteriorate / improve, additional / reversal of allowance may be required in future
periods.
(c) Net realisable value of inventories
Net realisable value of inventories is 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. These estimates are based on the current market condition and the
historical experience of distributing and selling products of similar nature. It could
change significantly as a result of competitor actions in response to severe industry
cycles or other changes in market condition. Management will reassess the estimations at
the end of each reporting period.
F-169
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
99
38 Accounting judgments and estimates (continued)
(d) Depreciation and amortisation
Property, plant and equipment are depreciated on a straight-line basis over the estimated
useful lives, after taking into account the estimated residual value. The Group reviews
annually the useful life of an asset and its residual value, if any. Intangible assets with
finite useful life are amortised on a straight-line basis over the estimated useful lives.
Both the period and method of depreciation and amortisation are reviewed annually. The
depreciation and amortisation expense for future periods is adjusted if there are
significant changes, such as operational efficiency or changes in technologies, from
previous estimates.
During the year ended 31 December 2014, the Group reviewed the estimated useful lives
of its property, plant and equipment and concluded that most of the Group’s buildings are
in good conditions, and are expected to be utilised beyond their original estimated useful
lives. As a result, the Group has revised the estimated useful lives of its buildings from
20 years to 30 years. The change in accounting estimates is accounted for prospectively
from 1 January 2014. The effect of this change in estimated useful lives is estimated to
have decreased depreciation expense by approximately RMB211,280,000 for the year
ended 31 December 2014.
(e) Impairment losses of long-lived assets
The carrying amounts of long-lived assets (including goodwill) are reviewed periodically
in order to assess whether the recoverable amounts have declined below the carrying
amounts. These assets (including CGU or group of CGUs to which goodwill is
allocated) are tested for impairment whenever events or changes in circumstances
indicate that their recorded carrying amounts may not be recoverable. When such a
decline has occurred, the carrying amount is reduced to recoverable amount. The
recoverable amount is the greater of the fair value less costs of disposal and the value in
use. In determining the value in use, expected cash flows generated by the asset (or CGU
or group of CGUs to which goodwill is allocated) are discounted to their present value,
which requires significant judgement relating to level of production volume, sales price,
amount of operating costs and the discount rate applied. The Group uses all readily
available information in determining an amount that is a reasonable approximation of
recoverable amount, including estimates based on reasonable and supportable
assumptions and projections of production volume, sales price and amount of operating
costs.
F-170
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
100
38 Accounting judgments and estimates (continued)
(f) Income tax
The Group is subject to income taxes in various jurisdictions. Significant judgment is
required in determining the worldwide provision for income taxes. There are many
transactions and calculations for which the ultimate tax determination is uncertain during
the ordinary course of business. The Group recognises, as current liabilities, liabilities
for anticipated tax issues based on estimates of whether additional taxes will eventually
be due. Where the final tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the income tax and deferred tax
provisions for the period in which such decision is made.
(g) Provision for warranties
As explained in note 31, the Group makes provision for warranties in respect of its
products, taking into account the Group’s recent claim experience and anticipated claim
rates for its products. As the Group is continually upgrading its product designs and
launching new models, it is possible that the recent claim experience is not indicative of
future claims that it will receive in respect of past sales. Any increase or decrease in the
provision would affect income in future years.
(h) Other provisions
The Group makes provisions for onerous contracts and outstanding litigations and claims
based on project budgets, contract terms, available knowledge and past experience. The
Group recognises provisions to the extent that it has a present legal or constructive
obligation as a result of a past event; it is probable that an outflow of resources will be
required to settle the obligation; and that the amount can be reliably estimated.
F-171
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
101
39 Possible impact of amendments, new standards and interpretations issued but
not yet effective for the year ended 31 December 2014
Up to the date of issue of these consolidated financial statements, the IASB has issued a
few amendments and new standards which are not yet effective for the year ended 31
December 2014 and which have not been adopted in these consolidated financial
statements. These include the following which may be relevant to the Group.
Effective for
accounting periods
beginning on or after
Amendments to IAS 19, Defined benefit plans: Employee 1 July 2014
contributions
Annual improvements to IFRSs 2010-2012 cycle 1 July 2014
Annual improvements to IFRSs 2011-2013 cycle 1 July 2014
Annual improvements to IFRSs 2012-2014 cycle 1 January 2016
Amendments to IFRS 11, Accounting for acquisitions 1 January 2016
of interests in joint operations
Amendments to IAS 16 and IAS 38, Clarification of acceptable 1 January 2016
methods of depreciation and amortisation
Amendments to IAS 27, Equity method in separate financial statements 1 January 2016
Amendments to IFRS 10 and IAS 28, Sale or contribution of assets
between an investor and its associate or joint venture 1 January 2016
Amendments to IFRS 10, IFRS 12 and IAS 28, Investment
entities: Applying the consolidation exception 1 January 2016
Amendments to IAS 1, Disclosure initiative 1 January 2016
IFRS 15, Revenue from contracts with customers 1 January 2017
IFRS 9, Financial instruments 1 January 2018
The Group is in the process of making an assessment of what the impact of these
amendments is expected to be in the period of initial application.
F-172
Huawei Investment & Holding Co., Ltd.
Consolidated financial statements for the year ended 31 December 2014
102
40 Comparative figures
During the year, the management has determined that certain operating support activities
in the Group’s selling organization, previously recorded as selling expenses, are more
appropriately presented as administrative expenses, and that the product management
activities for product divisions, previously presented as selling expenses, should be
changed to research and development expenses to more accurately reflect their function.
As a result of financial statement process improvement, management determined that
certain cash receipt from customers, are more appropriately presented as advances
received within other payables, rather than being offset against the receivables due from
the same customer.
The comparatives have been represented to comply with the current year presentation.
These changes in presentation have had no impact on reported operating profit or net
assets.
F-173
ISSUERProven Honour Capital Limited
P.O. Box 957Offshore Incorporations Centre
Road TownTortola
British Virgin Islands
GUARANTORHuawei Investment & Holding Co., Ltd.
Building No. 1, District BHuawei Industrial Base
Bantian, Longgang DistrictShenzhenChina
TRUSTEEDB Trustees (Hong Kong) Limited
Level 52, International Commerce Centre1 Austin Road West
KowloonHong Kong
PRINCIPAL PAYING AGENT AND TRANSFER AGENTDeutsche Bank AG, Hong Kong BranchLevel 52, International Commerce Centre
1 Austin Road WestKowloon Hong Kong
REGISTRARDeutsche Bank Luxembourg S.A.2, Boulevard Konrad Adenauer
L-1115 Luxembourg
LEGAL ADVISORS TO THE ISSUER AND THE GUARANTORAs to English law:Clifford Chance
27th FloorJardine House
One Connaught PlaceCentral, Hong Kong
As to PRC law:Jingtian & Gongcheng
34/F, Tower 3China Central Place77 Jianguo Road
Chaoyang District BeijingChina
As to British Virgin Islands law:Maples and Calder
53rd Floor, The Center99 Queen’s Road Central
Hong Kong
LEGAL ADVISORS TO THE JOINT LEAD MANAGERSAs to English law:
Linklaters10th Floor
Alexandra HouseChater RoadHong Kong
As to PRC law:Zhong Lun Law Firm
10th FloorTower A, Rongchao Tower
6003 Yitian RoadFutian District
ShenzhenChina
LEGAL ADVISORS TO THE TRUSTEEAs to English law:
Linklaters10th Floor
Alexandra HouseChater RoadHong Kong
INDEPENDENT AUDITORKPMG Huazhen
9th Floor, China Resources Building5001 Shenzhen East RoadShenzhen 518001, China
A.Plus InternationalFINANCIAL PRESS LIMITED150480027