Earnings Call: Q3 2018

Nov 8, 2018

Welcome to the Semiconductor Manufacturing International Corporation's third quarter 2018 conference call. Today's conference call is hosted by Dr. Zhao Haijun, Co-Chief Executive Officer, Dr. Liang Mong Song, Co-Chief Executive Officer, Dr. Gao Yonggang, Chief Financial Officer, and Mr. Tim Kuo, Director of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet at www.smics.com. Please be advised that your dial-ins are in a listen-only mode. At the conclusion of the management presentation, we will be having a question and answer session. At which time, you will receive further instructions as to how to participate. The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event. Without further ado, I would like to introduce to you Mr. Tim Kuo, Director of Investor Relations, for a cautionary statement. Thank you. Please go ahead. Thank you. Good morning and good evening. Welcome to SMIC's third quarter 2018 earnings webcast conference call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter. Then our Co-CEOs, Dr. Zhao and Dr. Liang, will provide some business commentary. This will be followed by our Q&A session. As usual, our call will be approximately 60 minutes in length. The earnings press release and financial presentation are available for you to download at www.smics.com, under Investor Relations in the IR Calendar section. Let me also remind you that the presentation we will be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the U.S. Securities and Exchange Commission and The Stock Exchange of Hong Kong Limited, including our annual report on Form 20-F filed with the U.S. Securities and Exchange Commission on April 27th, 2018. During the call, we will make reference to financial measures that do not conform to generally accepted accounting principles, GAAP. These measures may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non-GAAP numbers we will be discussing. Please note that all currency figures are in U.S. dollars, unless otherwise stated. I will now hand the call to our CFO, Dr. Gao, for financial highlights. Thank you, Tim. Greetings to all our listeners. First, I will highlight our third quarter results and then give fourth quarter guidance. In third quarter 2018, our revenue was $851 million, a decrease of 4.5% quarter-over-quarter. If excluding the technology license revenue grew mildly quarter-over-quarter, mainly due to an increase in wafer shipment in the third quarter. Gross margin was 20.5% compared to 19.7% gross margin excluding the technology license revenue in the second quarter, mainly due to the better utilization rates in the third quarter. Non-GAAP operating expenses were $228 million. Profits for the period attributable to SMIC was $27 million, while non-controlling interests were $19 million of credit to SMIC's attributable profit. Moving to the balance sheet. At the end of the third quarter, cash on hand, including financial assets, were close to $3 billion. Gross debt to equity was 42%, and net debt to equity was 5%. In terms of cash flow, we generated $260 million of cash from operating activities in the third quarter. Looking ahead into the fourth quarter of 2018. Our revenue is guided to be down 7%-9% quarter-over-quarter, mainly due to low seasonality. Gross margin is expected to range from 15%-7%, mainly due to the lower utilization rates, which is expected to be mid-80s%. Non-GAAP operating expenses are expected to range from $226 million-$230 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from positive $20 million to positive $22 million, which are losses borne by non-controlling interests. The planned 2018 CapEx for foundry operations decreases from approximately $2.3 billion to approximately $2 billion. Of which approximately $1.2 billion are expected to be spent for expansion of capacity and approximately $0.3 billion is mainly expected to be used for R&D equipment. The decrease in CapEx is mainly due to the equipment move-in schedule delay, and productivity improvement. The planned 2018 CapEx for non-foundry operations are approximately $110 million, mainly for the construction of employees' living quarters. Our planned 2018 D&A is approximately $1.06 billion. Our 2018 gross margin is expected to be low 20s%. If excluding the technology license revenue, our 2018 gross margin is expected to be high teens%. I will now hand the call over to our Co-CEO, Haijun, for our general remarks. Thank you, Yonggang. Thank you all for joining us on today's call. This morning, I will share with you the result of the third quarter, some highlights of our differentiated platforms, and our outlook for the remainder of this year. Overall, things are tracking in line with our original expectations. We remain cautious on the near term. The lackluster end markets and global tension continue to keep industry growth muted. The development and adoption of new technologies with China keep us optimistic about the long term. Internally, during our period of preparation and transition, we also continue to work on developing our technology and the platforms to align ourselves with the interesting trend in the China markets. Our third quarter results were in line with our original guidance. In the third quarter, our total revenue decreased 4.5% quarter-over-quarter, but increased 10.5% year-over-year. The decrease was a result of one-time technology license revenue actualized in the second quarter. When excluding revenue from this technology licensing, our revenue increased slightly Q-over-Q. We were in line with our third quarter gross margin guidance at 20.5%, a slight sequential increase. To address our markets and platforms. In the third quarter, our core business revenue from the China region hit record high, which grew 40% year-over-year at a 5% sequentially. We continue to see China represent the largest IC market. As the preferred foundry, we position ourselves and aim to capture the opportunities by working closely with our customers. China is not only the largest IC market but also is proactively developing and adopting new technologies in its cities from surveillance, artificial intelligence, to smart city and autonomous transportation. We believe that in the long term, this will prove beneficial to participants in the China IC supply chain, and especially to SMIC. As we continue to enhance our competitiveness to better serve our customers and address the opportunities, we also need to focus on our fundamentals while expanding and enhancing our mature and advanced nodes platforms. For example, we have expanded our fingerprint sensor portfolios as we have begun under-glass solution production and shipments. Although there was a general soft output, we still benefited from power IC, RF connectivity, and fingerprint-related devices. Consumer-related business, including set-top box and home IP plans, also add some progressive revenue. Our power management business platform continued to be one of our key revenue drivers for this year. We continue to see strong demands from this area for the coming year. Our revenue from power, RF connectivity, and fingerprint sensors grew 30% year-over-year and 5% sequentially in third quarter. As we are reaching towards the end of 2018, we maintain our revenue targets of high single-digit percentage growth. Our core business gross margin targeted in the high teens percentage and a positive annual net profitability attributable to shareholders. We do see the decline in revenue from mid to high single digits percentage for the coming quarter due to seasonality, market uncertainty, and the softer demand, as well as the continued weakness in the smartphone sector. The growing trade tension and the weakening of currencies also are causing uncertainties and limitations in the overall economic environment. In closing my remarks, we reiterate our annual targets and cautious outlook in the near term due to the global uncertainties, but remain optimistic in the long term given our unique position in the China market. We are in a formative chapter in the progression of SMIC's strategy for profitable growth and long-term value creation to benefit our customers, stockholders, and employees. We thank you for the continued support. I will now turn the call over to our Co-CEO, Liang Mong Song, for further comments. Thank you, Haijun, and good morning, everyone. Thank you for joining us today. I would like to take this opportunity to share our current progress on R&D and business development. We completed our 28 nanometer HKC+ development, and we now have several projects kicking off for our 28 nanometer platform. At the same time, we are on track with building up our 28 nanometer IP portfolio to serve a diverse range of customers. Meanwhile, our 28 nanometer high-k metal gate is becoming increasingly competitive as we enhance its performance and expand our portfolio and derivatives. On the FinFET side, I'm happy to say that we are also on track with our FinFET technology as we are working towards risk production in the second half of next year. As mentioned in my last earnings call, our first version of FinFET technology was ready for business engagement. We qualified our process and delivered our first FinFET process design kit to our customers. We are in an ongoing process of IP validation with our customers to verify the prototype functionality, while we aim to engage more business opportunities. Our FinFET may address mobile and wireless customers migrating from 20 nanometer, stemming from 4G LTE, and in the future, 5G in China. In addition to mobile applications, FinFET is suited to address emerging applications such as AI, IoT, and automotive industry sectors, as we plan to expand our 14 nanometer portfolios to cover these areas. We have seen quite a lot of changes in industry dynamics in the past few quarters and increasing opportunities in FinFET technology. We are accelerating our R&D, giving us the chance to seize opportunities. To conclude my remark to date, we are executing on our technology roadmap, and we will continue to execute our strategies cautiously while concentrating on more focused R&D efforts, seeking profit in our operations, targeting precise market opportunities and producing reliable quality products. Our strategy is to build up competitiveness in our key technology offerings, work closely with our customers to increase share, and to build up our ability to create long-term value for our stakeholders. We thank you for your continued ongoing support and for joining us today. I will now hand the call back to Tim for the Q&A session of this call. Thank you, Dr. Liang. Today's Q&A will be hosted. Dr. Zhao and Dr. Liang and our CFO, Dr. Gao. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Operator, please assist. Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, it's star and one if you wish to ask a question. Our first question comes from the line of Randy Abrams from Credit Suisse. Mr. Abrams, your line is now open. Okay. Yes, thank you. My first question about the applications. For third quarter, there was lower mix from consumer and also 55, 65 nanometer. Could you talk about the slowdown in those areas in third quarter? Looking to fourth quarter in your guidance, is it broad across application, the slowdown, or are certain applications pulling back more and some holding up better? Hi, Randy. Thank you for the question. Basically, we should say that the second quarter of this year for the communication sectors and home appliance are running very high, we really saw the third quarter, the corrections mainly for the inventory, this kind of thing, and the demands got slowed down. For the fourth quarter, that's the traditional seasonal quarter for the communications and other consumer products. We do not see a specific type of sector to go for extreme. This a general case they tie together to move down. For example, we have both the communication sector connectivity and the consumers, also including related memories, CIS, and power devices. They move to the same down trends, we really see that the correction on inventory. Just now I mentioned that also certain part of uncertainty, so the customer now become more conservative. Okay, great. Then one follow-up to the first, then I'll ask a second question. I guess looking ahead to 2019, if you see certain areas you're focused on, if you see areas to outgrow the industry, whether recovering 28 or filling in the 12-inch or gains on 8-inch. The second question I had was on the sale and lease back for $306.8. If you could walk through how that works in terms of you'll receive cash, then instead of depreciation, you may have more of an operating expense. Then if you plan to take advantage or use that leasing program more. Maybe if you can talk through how the leasing program would work and how much you may use that. Okay, Randy. I answer the question first then go for the detailed number financial for leasing. I'll give the call to our Dr. Gao, CFO, to give you more input on that. For the 2019, we believe that from second quarter on, the market will start to recover after two quarters type of a correction on the inventory and settle down the uncertainties. Beyond that, at a previous conference call, I also shared with you and the other listeners that we have prepared for the seasonality of the markets by building up additional platforms for our 12-inch. Previously, I mentioned about six to seven new product lines, like the development and expansion of the PMUs, CMOS image sensors, NAND flash, HV drivers, et cetera. For 12-inch, these kind of product platforms are brand new. They are the incremental revenue add on to our 12-inch wafer fabs. That's the growth points for our next year, together with the market recovery for the existing platforms and customers. For the operation, operating expense, and cash, and leasing, I believe we'll continue. That's a very good tool to support SMIC go together with expansion. For the detailed strategy, I give to Dr. Gao. Okay. Let me help you translate. This is Tim. Over the past two years, we tried to utilize the operation leasing strategy to end up in the end of third quarter this year, we have done $1.2 billion. In this coming quarter, we will use this strategy to expand another $300 million on operation leasing. According to this operation leasing, approximately $20 million of depreciation will be saved. Okay. This is the answer to your question. Okay. Just one quick follow-up. The $1.2 billion leasing, is that on top of the CapEx? Implying your equipment and investment is on top of the $2 billion, or? Yeah, if you could explain that. It is included. Included. Okay, great. Thanks a lot. Thanks, Randy. Thank you so much. Our next question comes from the line of Sebastian Hou from CLSA. Your line is now open. Hey, thank you. Good morning, gentlemen. Thanks for taking my questions. My first question is on the utilization rate. You are looking into fourth quarter, separately in the 8-inch and 12-inch. Seb, could you say your question again? Yeah, Sebastian, I got your question. You asked about the normalized utilization in the 8-inch and for the first quarter in SMIC. That is the normalization across 8-inch and the 12-inch. We should say that we are very strong on 8-inch utilization. We are still confident that. The lower part, mainly the 12-inch. Thank you. You're seeing into fourth quarter, the 8-inch UTR will still stay pretty high, but the softness will be mainly come from 12-inch. Am I right? Yes. Yeah. Just one follow-up. In terms of the 12-inch softness, is there any particular application or particular process nodes that are seen weaker than the others? Just now, when I answered the question to Randy Abrams, I mentioned that we see the seasonality across sectors. Consumer part, like a Bluetooth type, set-top box, are getting more heat in the fourth quarter. Okay. Got it. Thank you. My second question is on the inventory correction comments the CEO you just mentioned. It seems that your other foundry peers in Taiwan, TSMC, a month ago, it seems like they were not too worried about this, and they actually say that excessive inventory situation at the end of this year will be less severe than the end of last year. It seems like the CEO sounds more pessimistic or conservative compared to your peers. Can you elaborate more on that? What's the difference? Or maybe you see more weakness inventory correction coming from your Chinese customers or your foreign customers. I do not comment our peers. For SMIC part, and I really communicate very carefully, thoroughly with our customers. I really found that for the fourth quarter, they are doing correction on the inventory. Mainly because the second quarter, for the utilization, everything for SMIC is way too strong. At that moment, they prepare for many things. Now, they like to stabilize the inventory. We really see this correction in the fourth quarter. I believe this kind of correction and the seasonality will extend to the first quarter, and the recovery will mainly in the second quarter. Okay. Just the last one. I just want to follow on, I think the last quarter, you mentioned about the next technology development beyond 14 nanometers. I'm just wondering, maybe you haven't decided the name of that node, but I just still wonder in terms of the timeline, do you have a more specific timeline of that technology node? We already kick off that project, and the program's ongoing, on track, but it's too early to announce these kind of timelines. Okay. Thank you. That's all from me. Sure, thanks, Sebastian. Thank you so much. Our next question comes from the line of Charlie Chan from Morgan Stanley. Charlie, your line is now open. Hi, good morning. Thanks for taking my question. First of all, I want to talk about the trailing edge overcapacity issue, as some of your industry peers have mentioned that there should be some overcapacity in 28 nanometer, 40 nanometer, that is not going to resolve anytime soon, maybe take several years. My question is that, does that affect your commitment to the future CapEx? I remember a company promised that, in the coming two years, you want to keep the CapEx at the same level. This is my first question. Hi, Charlie. I got your question. For 12-inch, especially for 28 nanometer, and for the overcapacity situation in the industry, is well-known to everybody. SMIC has built up this 28 nanometer technology together with 40 nanometer technology with measured pace. Overall, we should say SMIC has not overbuilt too much. When you count the total available capacity in 28 nanometer, SMIC just take a very small fraction of this kind of overall build. At this moment, we still manage that 28 nanometer capacity, while in the meantime, we use the other platforms to share the capacity. Previously, I mentioned that SMIC is ramping up 24 nm standalone specialty, NAND flash, and we are also running 40 nanometer other platforms. They share the capacity. For SMIC, yes, in the fourth quarter this year, because of the seasonality and the correction on inventory, we see the lower utilization than the third quarter and second quarter. Overall, I mean the utilization for 12-inch, that's the across board, not specifically SMIC for 28 nanometer. Right. Okay, got it. It seems like your CapEx investment, especially for 14 nanometer could continue. Am I right on this part of CapEx comments? You mean 14 instead of 40, right? Yeah, 14 nanometer investment, and I would assume your CapEx to be flattish into the coming two years. Is that the correct interpretation? Yes, 14 nanometer CapEx for building up the initial stage of production for 14 FinFET is phased into the CapEx for next year. Yes. Okay. Yeah. Thank you. My next question is your profitability. Unfortunately, the company posted operational loss last quarter. With this kind of semi down cycle and tough industry competition, I mean, those are trailing edge capacity. When would the company, if that operational level can turn profitable again? Also, how is company going to manage your free cash flow? Meaning you want to spend the same level of CapEx, but at the same time, it seems like operational cash flow continue to be smaller than the CapEx. Does company need more funding or raise more debt in the coming years? Charlie, actually you raised quite many points there. That's very good. Thank you. Overall, we should say it this way, SMIC has announced our plan to build up on both sides. On the one hand side, we strengthen our manufacturing capability and to increase the profitability. On the other side, we continue to do the advanced technology development and to start the production of a 14 nanometer FinFET next year. We try to do our best to balance both. At this moment, our cash situation is very good. For the next stage, we'll try to do the measured pace on both sides to get the balance. Okay. Understand. Thank you. Thank you so much. Thanks, Charlie. Our next question comes from the line of Zhi-Hao from China Renaissance. Your line is now open. Thank you. Hi, good morning, gentlemen. I have two questions. The first one regarding the recent share buyback. Are there any conditions that you can share with us that will trigger more buyback going forward? 好的，我回答一些问题，我们同事会翻译给你。大家注意到我们在9月27号和10月4号，已经做过两次的股票回购。当然我们也已经公告了，可能大家已经关注到了。 Actually, we have done share buyback on the 27th of September, as well as the 4th of October this year. Actually, we have announced that. 当然了，我们也会持续地关注我们的股价走势，还有整个资本市场的走势。我们也不排除在未来有可能会做这样的股票回购的事情。 Actually, we are overseeing our stock movement as well as the capital market. Any extended share buyback is still projected. 好，谢谢。 Okay. Second question on the minority interest guidance. This year, you guide the minority interest for Q4 only slightly up from the Q3 level. For the last two years in 2016 and 2017, the Q4 minority interest number was significantly higher than the previous quarter. Just want to know what was the reason behind that? 这一方面我想大家应该注意到，中芯国际在先进工艺的产能建设上，大部分是采取的合资的方式。当然中芯国际控股，我们有其他的资金，是我们的少数股东。就是我们先进工艺的建设，都是有合资的方式。 Actually, we are leveraging the JV model in all of our advanced technology business. 那么我们好。 Sorry, go ahead. 所以说大家可能注意到，我们每个季度都会公告我们的NCI数据。当然这些数据是有变化的。 Actually, we will announce the NCI number every quarter, even they are subject to change depending on the actual results. 当然，随着我们像中芯南方、中芯北方这些公司的建设，后续的少数股东方会持续地为我们分担一些研发费用，以及这些新项目可能出现的亏损。 For upcoming SMIC South and SMIC North, the minority shareholders will continue to share the R&D expenses as well as the new projects. 好，谢谢。 That's the answer to your question, Zhi-Hao? Actually, that means that going forward, the minority interest is not going to be very lumpy in Q4, right? It's kind of spread out for every quarter. 什么？ Could you say your question again? The minority interest is going to be evenly spread out instead of very lumpy in Q4 every year, like in 2016 and 2017. 这个我们在不同的费用有不同的分担方式，像研发费用，我们既有一次性的，也有后续的，按照销售收入的进行的一些royalty的收入。 Actually for different expenses, we have different rules for listing. For example, like R&D or other royalties, we will list these expenses in accordance with the actual results. Okay. All right. Thank you very much. Thank you. Thank you so much. Our next question comes from the line of Chris Yim. Chris, your line is now open. Oh, hi. Thanks for taking my question. My first question is on the FinFET first version, risk production second half 2019. Can you discuss the number of tape out you expect next year? What type of customers are using your technology? Are they system customers or are they fabless customers? Thank you. Hi, Chris. Just like we already communicate through last quarter and this quarter that our FinFET and technology platform now is ready for customer engagements. We do have customers working with us to design the first product and the second. The first part is the logic part. The first application will be consumer media type as well as to mid to low-end mobile applications. Thanks。 We plan the portfolio to serve more sectors like IoT, automotive parts later. Thank you. My follow-up is on the 28HKC+. Would you be able to discuss the 28 nanometer outlook for next year, and how big of the contribution you expect to see from the HKC+ platform? Okay. You know, currently our available capacity for high metal gate C version has been running to the industrial performance, and the loading is pretty well. We switch this kind of C version loading to customers' demands and products to C Plus from early next year. The application more or less to the similar sectors and just upgrade from C version to C Plus version. From the capacity, just now I already mentioned that we do not have that much overbuild capacity because we do the 28 nanometer capacity and high metal gate mainly to the customer demands with the moderate pace inside of plant build and later looking for customers. The situation is still okay for 28 nanometer utilizations for SMIC. Thank you. My last question is on your differentiated technology. You mentioned quite a few of them. I also see in your presentation under your capacity by different fabs that you raised your Shenzhen 200 mm fab capacity from 35,000 to 40,000 in the third quarter. That it seems like it's for MOSFET. I was wondering if you guys will start making MOSFET, and what's your strategy on the discrete side? Thank you. Yes, that's true. We increased 5,000 wafer capacity to do MOSFET. That's the discrete device. On top of the existing capacity in Shenzhen five. For the Shenzhen five, it's a part of our 8-inch capacity. From previous comments already made on the 8-inch demands and the utilization in SMIC is still very good. Pretty full. This is something new, right? The MOSFET is something that you guys haven't made in your fabs before. This is a new product. Is that correct? We should say that quite many years back, when SMIC got a free capacity, we did make very small amounts of MOSFET in our Tianjin fab. We do have the customer base and the baseline, and now we have more customer approach SMIC to do this kind of products. You know the market situation. SMIC just provide this type of service. We do not have any fab space in Tianjin, Shanghai, or other place, and the only available clean room is in Shenzhen 5. That's why we set up the capacity there. I see. Thank you. That's all I have. Thanks. Sure. Yes. Thank you. Thank you so much. Next question comes from the line of Junjie Chen from Yuanta Securities. Your line is now open. Junjie, you're asking about whether there's going to be more capital injection from the minority shareholders. I'll let Dr. Gao answer this question. Yes. As far as this advanced technology business moving on at SMIC, as you can see, it's actually done by the JV model, the joint venture model. The shareholders will see different projects to inject the capital. The first half of this year, around $600 million has been injected, and we target at the end of this year to have another $960 million. For the external shareholders, for 2018, the minority shareholders will inject $1.5 billion as total. Okay. Junjie, you're asking about the NOR-NAND flash status, especially you have seen the revenue contribution from 55, 65 nanometer is decreasing in the past quarters. You are wondering whether there is going to be some capacity issues or some ASP pressures. I'll let Dr. Zhao to answer this question. Hi, Junjie. For this memory sector, SMIC is doing a specialty memory service to our existing customers. Overall, we should say that the production is maintaining the same, because customer demands are there. We really see the pricing pressures, and we have new competitors get into the 20, 24 something technology range in the NAND specialties. For the NAND flash, we also have the other competitors getting into the similar markets. Overall, we should say, the specialty memory, the applications follow the trend of the overall industry. When we have the seasonality, the demands for memory have the similar change. They tie together with set-top box, mobile phone, these kind of things. Our expectation is still that we'll have the similar trends go further down, and we feel the pricing pressure similarly in the markets. Thank you so much. Thank you. Our next question comes from the line of Peter Chen from CIMB. Peter, your line is now open. Hi, good morning everyone. Next question, please. A question earlier. Hi, can you hear me? Hello? Hello? Can you hear me? Hello, can you hear me? Hello? All right. Yeah. Our next question. Pardon the interruption. We are having some technical difficulties of your speaker. Please remain silent while I'm dialing out or reconnecting this speaker. You will be on music hold. Thank you. Mute. Excuse me. Hi. The speaker is now back online. Okay. There is some unexpected issue. Sorry about that. I'm so sorry for that one. We will be proceeding to your question, comes from the line of Rick Hsu from Daiwa Securities. Rick, your line is now open. Yeah. Hi, good morning, guys. I guess my first question is on your 28 nanometer specialty for HKC ramp-up. Sorry, HKC products. Could you give us some more color about your revenue contribution? Because I remember the 28 nanometer revenue ramp-up quite nicely in 2017 and hit a double-digit rate in Q4 2017 and started to stop. Right now it's still staying around the single digits. I'm just wondering, when do you guys expect the 28 nanometer to ramp up to double-digit contribution again sometime down the road? Hi, Rick. Thank you for the question. You know the thing for 28 nanometer, we have been keep commenting on this topic through the quarters. We should say this way, the first 28 nanometer ramp-up, in 2016 and 2017, we ramp up to over 10% type of revenue, mainly with the 28 nanometer polysilicon technologies in the mobile phone sector. Later when we have the high-k metal gate, we switch from mobile phone 28nm polysilicon to high-k metal gate Z type of version. That's for consumer type of products. Now we continue to run certain part of 28 capacity in the mobile sector for 28nm polysilicon products. In the meantime, we also run 28 HKC type of products. Now we introduce a C+ technology platform. First thing first, we're converting certain part of a C version, same product, into C+. We do not expect a ramping up in volume for the 28 sector. More or less maintain the similar volume to run that, because we have the existing customer in the mobile station. We also have the 28C customers in the consumer sector. We mainly just for the upgrading. We are building up 28 high C+ IPs, but they take time to get in additional productions. Hopefully in the second half of next year, we start to have additional loading from other customers to do this C+ ramping up. For the overall capacity build up for 28 nanometer, just now already mentioned that in the world, overall in the industry, they are over supplied. We do not have aggressive plan to expand the capacity to add on to 28 nanometer production. More or less, we maintain a similar volume dedicated to 28nm polysilicon and high-k metal gate. We do not expect the percentage getting higher in the overall revenue portion. Okay. Got you. Thank you so much. The second question is, how much government subsidy do you guys expect to receive in Q4 this year? This one I give to our CFO, Dr. Gao. Let me translate for you. Every year we are receiving the government R&D grant, and as you can see, because we put more emphasis on the advanced technology, the grant amount is increasing. We estimate in the fourth quarter, this government grant on R&D would be approximately $50 million. Okay, great. Thank you so much. The last question is, could you run through your 2018 CapEx update again? I missed this part at the very beginning. Ray, could you say it again? Could you run through your CapEx update for 2018? I think Gao Yonggang mentioned about this numbers update in the early part of this meeting, but I missed it. Could you run through the update again about this year's CapEx? The CapEx for this year is decreased from originally $2.3 billion to around $2 billion US dollars. Okay, great. Thank you so much. Oh, thank you. Thanks, Ray. Thank you so much. I would now like to hand the call back to IR Director, Tim Guo, for closing remarks. Before my closing remarks, I will hand the call to our Co-CEO, Dr. Liang, for some further statement. Thank you. Let me reiterate about our first generation FinFET technology, mass production date. We were still on track with the original plan. Our mass production will be in the first half of next year. Thank you. Okay, thank you, Dr. Liang. In closing, we would like to thank you everyone who participated in today's call, again, thank all of you for your trust and support. Thank you very much. This is the end of SMIC's third quarter earnings conference call. We thank you for joining us today.