ZTE : 2015 Annual Report

stock code : 000063.SZ 763.HK

Important

The Board of Directors, Supervisory Committee and the Directors, Supervisors and senior management of the Company confirm that this report does not contain any false information, misleading statements or material omissions, and collectively and individually accept responsibility for the truthfulness, accuracy and completeness of the contents of this report.

There are no Directors, Supervisors or senior management who do not warrant or who dispute the truthfulness, accuracy and completeness of the contents of this report.

This report has been considered and approved at the Second Meeting of the Seventh Session of the Board of Directors of the Company. Mr. Richard Xike Zhang, Independent Non-executive Director, was unable to attend the meeting due to work reasons and has authorised Mr. Lü Hongbing, Independent Non-executive Director, to vote on his behalf. Mr. Bingsheng Teng, Independent Non-executive Director, was unable to attend the meeting due to work reasons and has authorised Mr. Chen Shaohua, Independent Non-executive Director, to vote on his behalf.

The respective financial statements of the Group for the year ended 31 December 2015 were prepared in accordance with PRC Accounting Standards for Business Enterprises and with Hong Kong Financial Reporting Standards respectively, and had been audited by Ernst & Young Hua Ming LLP and Ernst & Young, and an unqualified auditors' report has been issued by each of them.

During the year, there was no significant deficiency in internal control in relation to financial reporting of the Company, nor was any significant deficiency in internal control in relation to non-financial reporting identified.

Mr. Zhao Xianming, Chairman of the Company, Mr. Wei Zaisheng, Chief Financial Officer of the Company and Mr. Shi Chunmao, Head of Finance Division of the Company, hereby declare that they warrant the truthfulness, accuracy and completeness of the financial reports contained in this report.

In view of the state of affairs of the Company, the proposal for profit distribution for 2015 is as follows: the payment to all shareholders of a final dividend of RMB2.5 in cash (before tax) for every 10 shares on the basis of the number of shares held by shareholders (including A shareholders and H shareholders) registered at the close of business on the record dates for registration of shareholdings for the purpose of dividend payments. The aforesaid matter shall require consideration and approval at the general meeting.

This report contains forward-looking statements in relation to subjects such as future plans, which do not constitute any specific undertakings to investors by the Company. Investors should beware of investment risks. The attention of investors is drawn to the section headed "Report of the Board of Directors - (IV) Business outlook for 2016 and risk exposures", which contains a description of the potential risks inherent in the operations of the Company.

This report has been prepared in Chinese and English respectively. In case of discrepancy, the Chinese version shall prevail, except for the financial report prepared in accordance with Hong Kong Financial Reporting Standards, of which the English version shall prevail.

China Securities Journal, Securities Times, Shanghai Securities News andhttp://www.cninfo.com.cnare designated media for the Company's information disclosure. Only information of the Company published in the aforesaid media should be relied upon. Investors are asked to beware of investment risks.

Contents

• 2 Definitions

• 4 Glossary

• 8 Company Profile

• 9 Corporate information

• 14 Chairman's statement

• 18 Major events of the Group

• 19 Highlights of accounting data and financial indicators

• 25 Summary of the Company's Business

• 30 Report of the Board of Directors

• 63 Material matters

• 103 Changes in shareholdings and information of shareholders

• 110 Directors, supervisors, senior management and employees

• 132 Corporate governance structure

• 161 Report of the PRC auditors

• 163 Financial statements prepared in accordance with PRC ASBEs and notes thereto

• 328 Independent auditors' report

• 330 Financial statements prepared in accordance with HKFRSs and notes thereto

• 440 Documents available for inspection

Definitions

In this report, unless the context otherwise requires, the following terms shall have the meanings set out below. Certain other terms are explained in the section headed "Glossary".

Company or ZTE	ZTE Corporation, a limited company incorporated in China, the shares of which
are listed on the Shenzhen Stock Exchange and the Hong Kong Stock Exchange,
respectively
Articles of Association	The Articles of Association of ZTE Corporation
Company Law	Company Law of the People's Republic of China
Securities Law	Securities Law of the People's Republic of China
Group	ZTE and one or more of its subsidiaries
Board of Directors	The board of directors of the Company
Directors	Members of the board of directors of the Company
Supervisory Committee	The supervisory committee of the Company
Supervisors	Members of the supervisory committee of the Company
China or PRC	The People's Republic of China
ITU	International Telecommunications Union, is a specialised agency of the United
Nations for information and communication technologies
NDRC	National Development Reform Commission of China
SASAC	State-owned Assets Supervision and Administration Commission of the State Council
CSRC	China Securities Regulatory Commission
Shenzhen CSRC	The CSRC Shenzhen Bureau
Shenzhen Stock Exchange	The Shenzhen Stock Exchange
Shenzhen Listing Rules	Rules Governing the Listing of Stocks on the Shenzhen Stock Exchange
Hong Kong Stock	The Stock Exchange of Hong Kong Limited
Exchange
Hong Kong Listing Rules	Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited
SFO	Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
PRC ASBEs	PRC Accounting Standards for Business Enterprises (Generally accepted accounting
principles in China)
HKFRSs	Hong Kong Financial Reporting Standards (including Hong Kong Accounting
Standards ("HKASs") and Interpretations)
China All Access	China All Access (Holdings) Limited
ZTE HK	ZTE (H.K.) Limited
Speed	Huizhou Speed Wireless Technology Co., Ltd.
Gongjin Electronics	Shenzhen Gongjin Electronics Co., Ltd.
2
Great Power	Guangzhou Great Power Energy & Technology Co., Ltd.
China-Hemp	China-Hemp Industrial Investment Co., Ltd. (renamed "Lianchuang Electronic
Technology Co., Ltd." with effect from 3 March 2016; stock name has been changed
to "Lianchuang Electronic")
Enablence Technologies	Enablence Technologies Inc.
ZTE Capital	Shenzhen ZTE Capital Management Company Limited
Zhonghe Chunsheng Fund	Shenzhen Zhonghe Chunsheng Partnership Private Equity Fund I
Jiaxing Fund	Jiaxing Xinghe Equity Investment Partnership
SDR	Special drawing rights
Zhongxingxin	Shenzhen Zhongxingxin Telecommunications Equipment Company Limited
Mobi Antenna	Mobi Antenna Technologies (Shenzhen) Co., Ltd.
Huatong	Huatong Technology Company Limited
Nanchang Software	Zhongxing Software Technology (Nanchang) Company Limited
Zhongxing Hetai	Shenzhen Zhongxing Hetai Hotel Investment and Management Company Limited
Zhongxing Development	Zhongxing Development Company Limited
Chongqing Zhongxing	Chongqing Zhongxing Development Company Limited
Development
航天歐華	深圳市航天歐華科技發展有限責任公司
Xi'an Microelectronics	Xi'an Microelectronics Technology Research Institute
Aerospace Guangyu	Shenzhen Aerospace Guangyu Industrial Company Limited
Zhongxing WXT	Shenzhen Zhongxing WXT Equipment Company Limited
Zhongxing Software	Shenzhen Zhongxing Software Company Limited
ZTE Kangxun	Shenzhen ZTE Kangxun Telecom Company Limited
ZTE Group Finance	ZTE Group Finance Co., Ltd.
Medium Term Note(s)	Perpetual Medium Term Notes
or Perpetual capital
instruments
Shanghai Zhongxing	Shanghai Zhongxing Telecom Equipment Technologies Company Limited
ZTE Microelectronics	ZTE Microelectronics Technology Company Limited
Nubia	Nubia Technology Limited
ZTE We Link	Shenzhen ZTE We Link Technology Company
ZTEsoft	ZTEsoft Technology Company Limited
Latest Practicable Date	10 April 2016, being the latest practicable date for ascertaining the contents set out
in this report prior to its printing
3

Glossary

This glossary contains definitions of certain technical terms used in this report as they relate to the Group. Some of these definitions may not correspond to standard industry definitions or usage.

2G

Second-generation mobile networks featuring digital wireless radio technology that enables larger network capacity, improved voice quality and more secure encryption, as well as seamless international roaming for users which includes GSM and CDMA. GSM (Global System for Mobile Communication) is a global system for cellular mobile communications originated in Europe using TDMA, while CDMA is a standard for spread spectrum technology. The data rate of 2G can reach 115.2Kbps. The data rate of GSM using EDGE (enhanced data rate for GSM evolution) can reach 384Kbps.

3G

Third-generation mobile networks supporting peak data rate of 144Kbps at mobile user speeds, 384Kbps at pedestrian user speeds and 2Mbps at fixed locations.

4G

Fourth-generation mobile networks operating according to IMT-Advanced standards as defined by ITU, including LTE-Advanced and Wireless MAN-Advanced (802.16m) standards, which support theoretical download rates of 1Gbit/s at fixed locations and 100Mbit/s in motion.

5G

Fifth-generation mobile communications, which is a general reference to the ensemble of post-4G broadband wireless communication technologies. The general view of the industry is that 5G is capable of providing faster data throughput (1,000 times faster than currently available) and more connections (100 times more than currently available), more efficient utilisation of energy (10 times of the current level of efficiency) and shorter end-to-end time delay (1/5 of the current length of time delay). It goes beyond human-to-human communication to cover a wide range of applications such as ultra-intensive networks, machine-to-machine communication and the internet of vehicles.

Pre-5G

The adoption of the 5G technology without modifying existing air interfaces standards, providing in advance a 5G-like user experience on existing terminals.

LTE

LTE (Long Term Evolution) which is the long-term evolution of 3G technology, refers to fourth-generation mobile communication technologies with OFDM as its core technology. LTE is being promoted by 3GPP and is continuously under evolution. There are two types of LTE, distinguished by the mode of division duplex, namely FDD-LTE of frequency division and TDD-LTE of time division. The mixed operation of FDD-LTE and TDD-LTE is supported. In terms of networking, its supports homogeneous networks formed by macro base stations as well as heterogeneous networks formed by macro base stations and micro base stations.

ICT

New products and services arising from the integration of IT (information technology) and CT (communications (i.e., the transmission of information) technology).

Cloud Radio

An innovative radio solution capable of automatic selection of optimal synchronization modes based on the properties of the mobile networks and mobile bearer conditions. It can effectively reduce inter-cell interference in LTE networks and significantly boost network performance in the cell edge.

QCell

QCell connects the BBU (base-band unit) to the PICO RRU (a small remote radio unit) and facilitates power supply to the PICO RRU through Ethernet, enabling LTE indoor coverage with the deployment of Ethernet cables only.

UBR

Ultra-broadband radio frequency that can support bandwidth of 170MHz at the 800MHz frequency band and 365MHz at the 1.8-2.1GHz frequency bands, which is significantly higher than conventional RRU (radio remote unit).

Magic Radio

An innovative technology which allows GSM and LTE to share the same frequency spectrum, hence supporting more GSM and LTE services within limited frequency spectrum width.

RCS

Rich Communication Suite, which helps carriers to develop the integrated ICT communications network business with the database of users' social connections, leveraging their strengths in network communications. By enabling manufacturers and corporations on the Internet to cooperate through integrated communication, RCS integrates existing VoIP and IM channels to into the integrated communications network and accumulates assets relating to users' information, thereby adding value to dataflow on the Mobile Internet.

PTN

Packet Transport Network, a network commonly using the MPLS-TP technology, designed to cater to the sudden nature of packet flow and the requirement for statistical multiplexing transmission and support multiple services provision with packet services as core services. PTN offers the advantage of lower total cost of use, while retaining the traditional strengths of optical transmission, such as high availability and reliability, efficient bandwidth and flow management, convenient OAM and network management, scalability and better security.

WDM

Wavelength Division Multiplexing, a technology that transmits a number of laser signals simultaneously onto a single optical fiber by using different wavelengths, resulting in the exponential increase of the transmission capacity of optical fiber.

OTN

Optical Transport Network, a transmission network formed at the optical layer based on the wavelength-division multiplexing technology. OTN solves the problems of traditional WDM networks, such as poor modulation in the no-wavelength/ subwavelength services, weak network formation and weak protection, through the "digital transmission system" and "optical transmission system" regulated by a range of ITU-T recommendations such as G.872, G.709 and G.798.

PON

Provision of optical fiber access service through unpowered optical network technologies, using point-to-multipoint topological structures that enable conservation of optical fiber resources for the main trunk as well as flow management and security control functions. PON can be distinguished into FTTH, FTTDp, FTTB and FTTC based on different destinations of optical connection, or GPON, EPON, 10G EPON and XG PON based on different technology standards.

IPTV

Internet Protocol Television is a brand new technology providing digital TV and a variety of other interactive services to home users utilising broadband networks and integrating Internet access, multimedia and communications in one device.

IDC

Internet Data Center, a site that houses servers of hosting companies, businesses or websites and provides maintenance and related services. It provides the infrastructure for the safe operation of various types of e-commercial activities and serves as the platform on which a company and its associates (distributors, suppliers and customers, etc) can carry out supply-chain management. IDC provides ICP, companies, media and various types of websites with safe and reliable specialised server maintenance, leasing, network bandwidth wholesale, ASP and EC services in large scale and with premium quality.

Glossary

IOT

Internet Of Things, also known as the sensor net, is a massive network connecting all sorts of information sensory devices, such as radio frequency identification units, ultra-red sensors, global positioning systems and laser scanners, to the Internet with the aim of connecting all things to the network for easy identification and management.

P-OTN

Packet Optical Transport Network, a network that facilitates MPLS-TP packet switch across an ODUk based on the uniform cell switch kernel, while supporting 100% packet to 100% OTN access in service modulation based on the PO hybrid line card. It can be extensively applied in the integrated carrier hosting of mobile backhaul, group customer lease line and home broadband, providing effective segregation of services of different natures.

SDN

Software Defined Network transforms a closed-end telecommunication equipment accommodating hardware and software into a novel architecture that features central control, open access and programmable software by separating the control face and the data face.

CDN

Content Delivery Network, a network structure that redirects a user's request to the nearest service node based on network flow and information of various nodes, such as connection and load status, distance from users and response time, on a real-time basis.

Mobile Internet

Internet access service facilitated through mobile terminals such as smart phones/ handheld digital assistants, notebooks and Pad, etc. Enriched by the popularization of smart terminals, Mobile Internet services now include mobile computing, mobile music, smart phone games, positioning technology, wireless communities and wireless payments, etc.

Cloud computing

The concept underlining the fusion of traditional computing technologies such as grid computation and distributed computation with network technology development. The core idea is to centralise the management and modulation of massive computing resources connected through the network, forming a pool of computing resources that serve users on an as-needed basis. Cloud Computing is applied in business models such as SaaS, PaaS and IaaS.

Big Data

A data set that is too large and complex to be processed by existing conventional database management technologies and tools, and that requires the use of new data processing and management technologies in order to create value from the set in a speedy and economic manner. It has revolutionary long-term implications for the development of informatisation, smart applications and business models of the society. Big Data is often characterised by 4Vs: Volume, Variety, Velocity and Value.

Smart City

The application of information technologies such as Cloud Computing, Internet of Things and Big Data in combination with wireline and wireless broadband communication technologies to sense, analyse and integrate various key information of the core operation systems of the city, so as to make automated responses to various requirements such as livelihood, environmental protection, public security, urban services and industrial/commercial activities, in realisation of smart management and operation of cities, creating better lives for citizens and facilitating harmony in and sustainable development for the city.

Industry 4.0

A concept introduced by the German Federal Ministry of Education and Research and Federal Ministry of Economics and Technology at the 2013 Hanover Fair. It represents the fourth industrial revolution of humankind, following the three previous industrial revolutions characterised by the steam engine, mass production and information technology, respectively. It is based on cyber-physical systems and marked by a high level of digitalisation, Internet applications, and machine self-organization. It is essentially the application of the Internet of Things and service nets in manufacturing and the integration of industries and information based on the intelligent factory, aiming to drive the transformation of manufacturing into an intelligent operation.

M-ICT strategy

The strategy of ZTE is to be an "Enabler@M-ICT that facilitates the creation of value through information." The letter "M" denotes a variety of meanings, which include: 1) Mobile: as handheld smart terminals become increasingly popular, ICT services are present everywhere; 2) M2M: the inter-connection of all things (Man-Man, Man-Machine, Machine-Machine); 3) Multiple connection: all-present connection; 4) Multiservice, More coverage and accessibility; 5) More secure, More reliable and easier to use.

M-ICT +

The implementation of the Internet+ strategy through M-ICT to assist the transformation of carriers and to help customers in the government and corporate service sector to increase efficiency and upgrade their operations, to the ends that the quality of people's life in general is improved. Internet+ connects the Internet with traditional industries and incorporates the Internet characteristics of openness, inter-connection, collaborative sharing and business innovation into the manufacturing and service operations of traditional industries, so as to drive the upgrade of these traditional industries, increase social productivity and promote changes in lifestyle.

Cloud + Net + Map

The core technological model of ZTE Smart City 2.0. The "Cloud" refers to the cloud platform of the Big Data centre and upper-level applications supporting cloud services, such as the storage, sharing and retrieval of PB-grade Big Data. The "Net" refers to flexible city-wide nets with high bandwidth, such as >10,000 G optical backbone network, IOT and LPWA, supporting safe segregation, safe and reliable data transmission and flexible adaptation. The "Map" refers to multi-dimensional spatial node positioning and diversified spatial data services based on smart sensors and true 3D geographic information.

CGO Laboratory

Responsible for the incubation of innovation projects and the development and operation of Blue Ocean projects of the Company to support the implementation of the blue ocean strategy under the Company's M-ICT strategy, in realisation of its strategic transformation to become "cooler, greener and more open."

Wearable device

A new form of terminal device featuring the integration of software and hardware worn on the human body, capable of ongoing exchange and a considerable level of computation. It is a product arising from the ongoing developments of communications technologies, computer technologies and micro-electronic technologies under the computational concept of the "priority of people" and "human + machine unification." It may come in the form of watches, bracelets, spectacles, helmets and footwear, etc.

Company Profile

The Company is a leading integrated telecommunications equipment manufacturer in the world market and a provider of global telecommunications solutions, with shares listed on the main board of the Shenzhen Stock Exchange and the Main Board of the Hong Kong Stock Exchange.

In November 1997, the Company conducted an initial public offering of A shares for listing on the main board of the Shenzhen Stock Exchange. The Company is currently the largest telecommunications equipment manufacturer in China's A share market. In December 2004, the Company conducted an initial public offering of H shares for listing on the Main Board of the Hong Kong Stock Exchange, becoming the first A-share company to be listed on the Main Board of the Hong Kong Stock Exchange.

The Group is dedicated to the design, development, production, distribution and installation of a broad range of advanced ICT-related systems, equipment and terminals, including carriers' networks, government and corporate business and consumer business.

The Group is one of the major telecommunications equipment suppliers in China's telecommunications market and has also succeeded in gaining access to the international telecommunications market with respect to each of its major product segments. The Group has achieved a leading market position for its various telecommunications products in China with longstanding business ties with China's leading telecommunications service providers such as China Mobile, China Telecom and China Unicom, and is recognised as a "benchmark enterprise in Smart City". With respect to the global telecommunications market, the Group has provided innovative technology and product solutions to telecommunications service providers and government and corporate clients in more than 160 countries and regions, making contributions to facilitate communications via multiple means, such as voice, data, multi-media, wireless broadband and cable broadband, for users all over the world.