Welcome to Semiconductor Manufacturing International Corporation second quarter 2021 webcast conference call. Today's call will be live streamed through the internet at SMIC's website. Webcast playback will also be available approximately one hour after the event. Please be advised that your dial-ins are in listen only mode. However, at the conclusion of the management's presentation, we will have a question and answer session, at which time you will receive instructions on how to participate. Today's conference call will proceed in both Chinese and English. [Non-English content ] Without further ado, I'd like to introduce Ms. Guo Guangli, Board Secretary for the forward-looking statement.
[Non-English content]
Greetings, welcome to SMIC second quarter 2021 earnings call. Today's call is hosted by Dr. Zhao Haijun, Co-Chief Executive Officer and Dr. Gao Yonggang, Chief Financial Officer. The call will last about 60 minutes. The management will provide their commentary in Chinese and investor relations team will provide English interpretation. During the subsequent Q&A session, we will accept questions in both Chinese and English.
[Non-English Content]
The earnings release and presentation are available at www.smics.com. Let me remind you that today's presentation includes forward-looking statements that do not guarantee future performances, but represent our estimates and are subject to risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings statements use International Financial Reporting Standards IFRS, and all currency figures are in US dollars, unless otherwise stated. We will also reference financial measures that do not conform to IFRS in order to help investors compare SMIC's past performance. These non-IFRS measures may differ from similar data presented by other companies. Please refer to the tables in our announcement.
[Non-English content]
I will now hand the call to CFO Dr. Gao Yonggang for financial highlights and guidance.
[Non-English content]
Thank you all for joining our second quarter earnings webcast. Today I will first highlight our second quarter and first half of 2021 unaudited results, then give the third quarter guidance and second half outlook. Please be reminded that all earnings figures in the following statements are prepared in accordance with International Financial Reporting Standards IFRS, unless otherwise stated.
[Non-English content]
The company's key financial metrics were better than expected in the second quarter. Revenue in Q2 was $1,344 million, an increase of 21.8% quarter-over-quarter, and an increase of 43.2% year-over-year. Gross margin was 30.1%, up 7.4 percentage points quarter-over-quarter, and up 3.6 percentage points year-over-year. Main reasons for the growth in Q2 were shipment increase, product mix optimization, and pricing adjustment. Q2 profit from operations was $538 million, an increase of 331.4% quarter-over-quarter, and an increase of 731.6% year-over-year. Among which proceeds of $231 million are from the disposal of SJ Semiconductor. If excluding the proceeds from the disposal, Q2 profit from operations grew 145.8% quarter-over-quarter and 373.8% year-over-year. Profit for the period attributable to SMIC was $688 million, an increase of 332.9% quarter-over-quarter and 398.5% year-over-year. Profit attributable to non-controlling interests was $20 million.
[Non-English content]
Moving to the balance sheet. At the end of Q2, total assets were $32.2 billion. Among that total cash on hand, including cash and cash equivalent, related restricted cash and financial assets was $15.5 billion. Total liabilities was $9.4 billion, while total equity was $22.8 billion. Total debt was $6 billion, lower than total cash on hand, and net debt was negative $9.4 billion after deducting cash on hand. Total debt to equity was 26.5% and net debt to equity was negative 41.3%. In terms of cash flow in Q2, we generated $1,039 million of cash from operating activities. Net cash used in investing activities was $3,048 million. Net cash from financing activities were $140 million.
[Non-English content]
Based on Q2 results, I will summarize unaudited results of the first half of 2021. Revenue in the first half was $2,448 million, an increase of 33% year-over-year. Gross profit was $655 million, an increase of 36% year-over-year. Gross margin was 26.8%, an increase of 0.6 percentage points year-over-year. Profit for the period attributable to SMIC was $847 million, an increase of 319% year-over-year.
[Non-English content]
For the third quarter, our guidance is as follows: revenue is expected to grow 2%-4% sequentially, and gross margin is expected to range from 32%-34%. Non-IFRS OpEx and profit attributable to non-controlling interests are expected to increase sequentially.
[Non-English content]
Based on the first half results and the second half outlook, and under the uncertain assumption of a relatively stable external environment, we now raise our annual revenue growth target and gross margin target to be around 30% respectively. The adverse impact of advanced technology to the company's overall growth margin is expected to decrease to around 5 percentage points due to depreciation and amortization allocated to more outputs. This year's CapEx, depreciation and amortization are carrying out as planned. Annual EBITDA is expected to be above $3 billion. The company still faces impact brought by the entity list, and there are still uncertainties with our expectations in indicators. We will do our best to solve the problems, to ensure operation continuity and improve performance for a better return to our shareholders. This concludes the financial remarks. Thank you.
[Non-English content]
Thank you Dr. Gao for the financial update. I will now hand the call to our Co-CEO, Dr. Zhao Haijun, to comment on market, company operations, and technology platform.
[Non-English content]
Welcome to today's earnings webcast. With the recurring epidemic, the stay-at-home economy demand for Internet of Everything has continued to bring market opportunities to the IC industry. The demand requirements mainly come from three areas: first, the existing traditional demand has remained solid; second, various product upgrades and enhancements generate incremental demand, such as the migration of 4G to 5G products, the rise of electric vehicles and charging stations, short-range connectivity for smart homes, the development of carbon neutrality and other trends have together resulted in a substantial increase of single-product silicon content and overall demand. Third, the landscape of the IC industry has also shifted. The demand for domestic indigenous manufacturing has increased substantially. The incremental buildup of demand of these three components has resulted in capacity short supply in semiconductor manufacturing, and the bottleneck issues of peripheral chips are particularly prominent.
[Non-English content]
SMIC is facing longer procurement cycle times and uncertainty in operational continuity and capacity expansion amidst the hot market due to supply chain risk brought by the entity list. During these past few months, the company made more efforts, research and refine in every link, and discover some proven methods and paths, continue to overcome difficulties and furthermore exceeded original revenue expectations.
[Non-English content]
[Non-English content]
Today, we will cover the highlights of the second quarter from 2 main aspects. First is the company's business. In terms of mature technology, we are steadily and firmly working to satisfy our customers with high quality function competitive products. The 7 major applications and 8 key platforms that we have been laying out over the past few years are the precise areas where there are prominent bottleneck issues. With limited capacity, we remain consistent in our capacity allocation principle, giving priority to long-term strategic customers, high ASP, high margin products, and demand for our customers' key products.
[Non-English content]
In terms of advanced technology, the development of product platforms continues, and the effectiveness of customer engagement and product diversification reservation are gradually emerging. Utilization rate of advanced technology climbed in second quarter, and its performance was better than expected. Its adverse impact to the company's overall growth margin is expected to reduce from 10 percentage points to about 5 percentage points this year. Due to the impact of the macro environment, the speed of capacity expansion is constrained and economies of scale has not yet been achieved for the advanced technology.
[Non-English content]
In the second quarter, revenue increased to $1,344 million, grew $240 million compared to first quarter, up 22% sequentially and 43% year-over-year, driven by both mature and advanced business, in which FinFET and 28nm combined revenue grew 158% sequentially and contribution rose to 14.5% of total wafer revenue. Overall, revenue contribution by application in the second quarter for smartphones, smart home, consumer electronics and other applications were 32%, 12%, 25% and 31% respectively. Revenue of each application segment increased respectively with different magnitudes. Among these, consumer electronics revenue increased about 50%, demonstrating the stay-at-home economy, driving the rising of new formats, new models and new applications. Looking more closely, digital cameras, traditional home appliances and other related applications were the fastest-growing applications for consumer electronics. Their revenue doubled sequentially.
From a platform perspective, high voltage driver chips for large and small screens continued a rapid growth trend from the first quarter, with revenue growing by about 56% sequentially. While CIS specialty memory, BCD power management and other platforms also performed well. By geography, the revenue contribution of Chinese Mainland and Hong Kong China rose 7 percentage points with revenue growth of 38% sequentially.
[Non-English content]
The aforementioned is the status of the company's business. Next, we will report on the status of our export license application and capacity expansion. Since being placed on the entity list last year, SMIC has been proceeding forward through difficult circumstances, and the entire company has been working hard, devoting a lot of human, material and financial resources for this. In terms of operation continuity, we are actively working with our suppliers to ensure that our commitments to customers are met, and the risks of uncertainty of mature technology is further reduced. In terms of capacity expansion, its progress is rolling out as planned. By the end of the second quarter, our overall 8-inch equivalent capacity was 562,000 wafers per month, with an increase of about 21,000 wafers from the end of the previous quarter.
However, uncontrollable factors such as license approvals, supply chain tightness, and logistics impacted by the epidemic have also inevitably affected the equipment arrival times. The company will make every effort to optimize the internal procurement process and speed up the efficiency of capacity installation in order to shorten the procurement cycle as much as possible and reach production as soon as possible.
[Non-English content]
That concludes the second quarter highlights. Next, we will share our thoughts on the second half of this year. Revenue in second quarter was $1,344 million, an increase of 22% quarter-over-quarter. The significant growth mainly came from increased capacity and utilization, higher ASP and pulled-in shipments. Some shipments pulled in from third quarter to second quarter as per customers' urgent demand. Thus, in the third quarter, revenue is not expected to continue to grow significantly, and is expected to increase 2%-4% sequentially. With the changes in the market and the company's precise tackle on difficulties, we revised the full year target upwards and expect annual revenue growth target and annual growth margin target to be around 30%. However, uncertainties still exist, coupled with factors such as the U.S. entity list, the epidemic and global industry chain tightness.
[Non-English content]
During this period, our achieved progress is inseparable from the support of all employees and also attributable to the efforts we made in the area of talent team building. In line with the principle of strengthening the foundation and consolidating resources, we launched an equity incentive program in the second quarter to retain talents, synergize the growth of talents with the development of the company to achieve a win-win situation. We carry out public and campus recruitment synchronously. In line with the pace of capacity expansion. In the first half of this year, we recruited nearly 1,000 employees from campus recruitment, in which over 100 of them hold doctoral degrees. Young and high-quality fresh blood lay a foundation for the company's talent reservation. The company also welcome talents who are willing to join the IT industry.
[Non-English content]
Finally, we would like to thank our customers, suppliers, investors, and the public for their trust and support. We also understand that people have high expectations for us. There is no shortcut or leaping forward in the semiconductor manufacturing industry. We will take one step at a time, seize our own advantages in specific market segments, improve our core competitiveness, and enhance customer satisfaction. This ends my remarks. Thank you.
[Non-English content]
Thank you, Dr. Zhao. Next is our Q&A session. Chinese questions will be answered in Chinese. English questions will be answered in English. As usual, please limit your questions to two per person. Questions will be answered by Dr. Zhao and Dr. Gao. I would now like to open up the call for Q&A. Operator, please assist.
Thank you. If you wish to ask a question, please press star 1. First question comes from the line of Randy Abrams of Credit Suisse. Please go ahead.
Okay. Yes. Thank you, and congratulations on the good result, especially considering the restrictions. The first question I wanted to ask on the sales guidance for third quarter and also for 2021. For Q3, could you split out the 2%-4% between shipment and ASP? For 2021, the 30% guidance seems to imply an up to 10% decline in fourth quarter. I wanted to see if you're factoring just conservatism due to the restriction or if you see any limitation on capacity or demand or any change in demand for fourth quarter.
[Non-English content]
Hi, Randy. Thank you for the questions. Your questions mainly are on the job in the fourth quarter based on calculation from the third quarter. The first thing first, the third quarter already ongoing. We can see the wafers are moving, everything. The confidence is very high that we can meet that forecast. The fourth quarter, actually from capacity point of view, we have a larger capacity in fourth quarter than third. The forecast is based on caution. We still see certain uncertainty there. So that we put a certain forecast to cover this kind of uncertainty. If you say the best case, and we resolve all the uncertainty issues, the fourth quarter shouldn't be worse than the third quarter. That's true. At this point, we want to forecast the fourth quarter with a certain type of caution.
Come up with the results just now I mentioned.
Okay. Just 1 follow-up to the first question. Is the uncertainty relating to the entity list just on either material or tools, or is it more of an uncertainty in terms of the customer orders?
We can't go too detailed on this kind of uncertainty. Yeah, from both sides, from supply chain point of view for certain type of supplies of equipment parts. That's one of the things we are working very hard to resolve quickly. Another thing is that for certain customers, and you know for certain capacities, we do have customer change. We are working on that part to settle down the uncertainty.
Okay. If I could ask just a second question on the CapEx. In the first half, you spent about $1.3 billion but maintained the $4.3 billion. Do you still see the equipment, because you mentioned some arrival delays? Do you still see the planned 8-inch, I think, the 45K and the 10K 12-inch? Does that still look on track in the overall $4.3 billion, or you need to resolve some licenses to reach that? Then, the follow-up to that is, do you have further plans to expand Beijing or Shenzhen, where you have big facilities? Do you have a next phase to meet next year's demand?
Yes, Randy. Based on the shipment schedules given by our suppliers, we do have a lot of machines coming in in the first quarter this year. In the meantime, we are also building up the fab shells and other facilities in Beijing and Shenzhen. Taking into the account of both facilities building up and machines arrival times, we believe that the CapEx, just now you mentioned that $4.3 billion, roughly around there. We still believe that this year the CapEx spending more or less is the number. Even though the first half year the number is much less than the proportional ratio.
OK, just to follow up, do you have a rough plan on additional capacity just to kind of meet some of the demand that you expect into next quarter, like for the next phase, how much to add on the 8-inch and 12-inch?
For this year, we still stick to 45,000 wafers incremental for the capacity monthly and 10,000 wafers 12-inch monthly in Beijing. For this year, the forecast still maintain the same, and it is still too early to forecast next year.
OK, all right, fair enough. Thanks a lot.
Thanks, Randy.
Thank you for the questions. Next questions comes from the line of Szeho Ng of China Renaissance. Please ask your question.
[Non-English content]
[Non-English content]。
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content] Congratulations.
[Non-English content]
Thank you for the questions. Next question comes from the line of Leping Huang of Huatai Securities. Please go ahead.
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
Thank you for the questions. Next question is to come from the line of Zhu Jing Song of Haitong. Please go ahead.
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
Thank you for the question. Next question comes from the line of Charlie Chan of Morgan Stanley. Please ask your question.
[Non-English content]
[Non-English content]。
[Non-English content]？
[Non-English content]
[Non-English content] 。
[Non-English content]
[Non-English content]
Thank you. That concludes the Q&A session today.[Non-English content] I would now like to hand the call back to Ms. Guo for closing remarks.
[Non-English content]
Thank you all for participating in today's conference call. Thank you for your trust and support.
[Non-English content]
This concludes SMIC second quarter earnings conference call. We thank you for joining us today.