Ladies and gentlemen, welcome to Semiconductor Manufacturing International Corporation's fourth quarter 2017 webcast conference call. Today's conference call is hosted by Dr. Haijun Zhao, Co-Chief Executive Officer, Dr. Mong Song Liang, Co-Chief Executive Officer, Dr. Yonggang Gao, Chief Financial Officer, and Mr. Tim Kuo, Director of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet at smic.com. Please be advised that your dial-ins are in listen-only mode. However, at the conclusion of the management presentation, we'll be having a question and answer session, at which time you'll receive further instructions as to how to participate. The earnings press release is available for downloaded at smic.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 the cautionary statement. Thank you.
Good morning and good evening. Welcome to SMIC's fourth quarter 2017 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 smic.com under Investor Relations in the Events and Presentation section. Let me also remind you that the presentation we'll 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 Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed with the U.S. Securities and Exchange Commission on April 27, 2017. 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.
Okay. Thank you, Tim. Greetings to all our listeners. First, I will highlight our 2017 full year unaudited results, which are based on the submission of our unaudited quarterly results for the year of 2017 and our fourth quarter results. Then give first quarter 2018 guidance. Revenue in 2017 was $3.1 billion, a record high compared to $2.9 billion in 2016. Gross margin in 2017 was 23.9% compared to 29.2% in 2016. Profit for the period attributable to SMIC in 2017 was $180 million, compared to $377 million in 2016. EBITDA reached record high of $1.12 billion in 2017, compared to $1.06 billion in 2016. 2017 CapEx for foundry operations were $2.46 billion, while CapEx for non-foundry operations were $29.5 million. In fourth quarter 2017, our revenue was $787 million, an increase of 2.3% quarter-over-quarter, mainly due to the increase of wafers shipment.
Gross margin was 18.9%, mainly due to high depreciation, product mix change, and price pressure. Non-GAAP operating expenses were $201 million. Profit for the period attributable to SMIC was $48 million, while non-controlling interests were $49 million. Of that to SMIC's attributable profits, mainly due to the recognition of R&D cost sharing by our Beijing JV.
Moving to the balance sheet. At the end of fourth quarter of 2017, cash on hand, including other financial assets, were $2.5 billion, compared to $1.7 billion at the end of the previous quarter, mainly due to proceeds received from issuance of shares and capital injection from non-controlling parties. Gross debt to equity ratio was 49%, and net debt to equity ratio was 12%. In terms of cash flow, we generate $324 million of cash from operation activities in the fourth quarter. Looking ahead into the first quarter of 2018. Our revenue is guided to be up 7%-9% quarter-over-quarter, mainly due to the recognition of approximately $150 million one-time technology licensing revenue. Gross margin is expected to range from 25%-27%, mainly due to the previous machine and technology licensing revenue, partially offset by low utilization rates, high depreciation, and product mix change.
Non-GAAP operating expenses are expected to range from $212 million-$218 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from positive $15 million to positive $70 million, which are losses to be borne by non-controlling interests. The planned 2018 CapEx for foundry operations are approximately $1.9 billion, of which approximately $0.5 billion are expected to be spent for expansion of capacity in our majority-owned Beijing JV, and $0.4 billion are expected to be spent for new projects in Tianjin. Others are mainly for equipment upgrade, facility construction, and etc. The planned 2018 CapEx for non-foundry operations are approximately $48 million, mainly for the construction of employees living quarter. Our planned 2018 D&A is approximately $1.1 billion, mid-teen growth compared to the previous year. I will now hand the call over to Co-CEO Haijun for general remarks. Thank you, Yonggang.
An early happy Lunar New Year to all our listeners. Thank you for joining us. Looking at 2017, we increased our annual revenue by 6.4% year-on-year, in line with the growth rate of the foundry industries, in spite of the challenges of the high downstream inventory and the changing market environment. We also successfully ramp up our 28-nanometer technology portfolios and have seen more than 10% revenue contribution in the first quarter of last year. Meanwhile, we have contributed and enriched our technology offerings to diversify our revenue streams. For example, our automotive and industry revenue doubled in 2017 compared with previous year. In 2017, revenue from communications and consumer remained flattish, and computing grew by 46.1% year-on-year. Our constrained growth was mainly a result of a slow handset market, mobile phone market, which continue to impact us now.
By region, North America-based customer contributed to a majority of our growth, increasing by 44.5% year-over-year. Meanwhile, China customers remained flattish, and the European region declined 35%, which was also due to the mobile phone exposure. The first quarter last year revenue and gross margin was in line with our guidelines, with moderate growth and a decline, respectively. Margin decline was mainly from increased depreciation of our equipments and the pricing pressure. Taking on the role of Co-CEO with Dr. Liang last year, we confronted changing market dynamics, and we began the process of refining our business, recalibrating our product mix, and accelerating technology migration for our customers. Today, we are putting more efforts into our technology development, so to ensure our future growth targets. Dr. Liang will later share more on our technology developments.
Looking forward into this year, 2018, we will continue to be confronted with increasing competition pricing pressures and a slower growth of certain end markets. 2018 will also be challenging for our profitability given the changing market dynamics. As we introduce new fabs and adjust product mix to address the evolving market. Our customers have been facing increasing competition, particularly in communications and the consumer space, resulting in increased pricing pressure to us. In this year of transition, we still target to grow annual revenue in line with the industry, high single-digit growth. We aim to maintain gross margin in the teens percentage level and a positive net profitability attributable to SMIC shareholders. For 2018, foundry CapEx is at $1.9 billion, a decrease of $500 million compared to the last year. As we invest in equipment according to clarity of demands and technological capability.
In this year, we'll adjust our product mix and prepare facilities to accommodate expansion when these two requirements are met. In this time of adjusting our product mix, we will not decrease our R&D activities. R&D expenses are targeted to maintain in the teens percentage, and funding from the government for R&D projects will increase as well. With the changes in market dynamics, we see customers migrating to more advanced nodes at a faster rate, and we need to adjust accordingly, especially in the digital logic market sector. As the largest and most advanced Chinese foundry, we aim to be a world-class foundry with the scale and the technology to serve our customers in the mainstream market. We are also accelerating mature and advanced technology developments, as well as building up key platforms and strategic partnerships.
To address increasing competition and to be more effective in our capacities, we focus on key platforms where SMIC is and can be competitive and a preferred foundry source. We will work with our customers to better cater to their needs and win the market together. We have already pinpoint a number of key platforms to address, and today I will highlight two of them. Our NOR flash platform and CMOS image sensor platform. These two platforms' revenue to SMIC grow almost 70% in last year compared with the year before. We continue to build on our platform strategy and seek to expand our customers' business. We are working hard to implement this market adjustment strategy within the company, and we ask our stakeholders to stay tuned as we deliver key checkpoints on platform development and technology advancement. SMIC is situated in China, the largest market for ICs.
We believe we can continue to benefit from the continued IC market growth in China. Revenue from China-based customer grow by 15% in Q4 compared with Q3 last year. We continue to see growth from the region in this year. We recently announced the setting up of SMIC South, which is our joint venture in Shanghai with Shanghai IC Fund and China IC Fund. Together, our joint venture partners will contribute funding for the capacity expansion and the R&D of advanced technologies. We trust we can capture large opportunities as we deliver our new growth strategies. We believe our position as the foundry of choice in China will hold solid and grow stronger as we target to increase our scale and market share in the markets. To summarize, the year ahead of us will be very challenging for our business.
However, with our co-CEO structure and the leadership, we have increasing confidence that we can execute on our strategies and deliver our operational and R&D results. SMIC is in a transition to align to customers' fast technology migration in today's dynamic foundry environment. We have great opportunities in front of us, I believe we have the right team to execute the acceleration of technology development to capture these prospects. We have confidence that SMIC will emerge stronger, bigger, and profitable. We appreciate your patience as we work to advance SMIC to a world-class company. I will now turn the call over to our co-CEO, Mong Song, for technology comments.
Thank you, Haijun, thank you to everyone on the call for joining us. Since I joined SMIC, we intensely evaluate our strategy and R&D focus. With our position in China, we are given great opportunities. However, we have not captured this due to lack of technology readiness. In order to sustain in the long run, we must drive technology development and capture the large waves of opportunities brought to us in China. We must also enrich our mature technologies to address the continued demand for competitive offerings for diverse applications. My confidence in our team's ability to deliver technology has vastly increased compared to four months ago when I first joined. I'm encouraged by the quick results of increased employee discipline, efficiency, and performance. In this past month, our team has increased a sense of ownership, accountability, and urgency. I'm now confident in this team.
Let me update you on our FinFET technology development. Since on board, I have concentrated much effort on FinFET development, which is crucial for a wide variety of advanced computing applications. We have revised our FinFET plan, have seen rapid improvements in device performance as well as yield, believe our FinFET solutions will be competitive. In terms of our 28-nanometer platform, our manufacturing team has recently delivered faster than expected yield improvements on 28-nanometer HKC. Meanwhile, our 28-nanometer HKC+ is on target to enter production in the second half of this year. On mature technology platforms, we are focused various areas such as NOR flash, CIS, and Power IC. We are building a competitive BCD power management IC platforms. Our team is executing on a roadmap of continued development of this platform to provide various levels of voltage, better performance, and higher density solutions.
To conclude my remark to date, I have high expectations on SMIC, especially for our R&D team. At the same time, I have great confidence that we will deliver. Furthermore, I'm confident in our team's capability to utilize this time to prepare, develop, and recalibrate our technology to create greater value for the future. We have instilled disciplines and a sense of urgency to execute, deliver, and to exhibit our position as a world-class foundry. We thank everyone here for your support, and we'll continue to update you in the coming quarter. 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 by our Co-CEOs, 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. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound hash key. Your first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes, thank you. I'll start to follow up on the R&D discussion. If you could talk, it sounds like some milestones coming through, both on 28 and FinFET. Could you discuss the view on 28 through the transition period this year as we move from PolySiON to HKC? How you expect 28 to progress? Then outlook, I guess, from this progress, when you think we get the next waiver or meaningful inflection of the HKC into high volume production. Then following, if you have a latest view on FinFET for your commercial ramp-up of FinFET.
20.
Hi, Randy. Thank you for the question. I answer the 28-nanometer technology first, and Meng Song will follow up the FinFET. As you know, for 28-nanometer, probably they are mentioned that we have three steps to go, and we are already successfully running the PolySiON for quite a couple of years. This year, we also ramp up 28nm HKC, and you know that in the fourth quarter, they are more than 10% of the contribution to our revenue and yield improvement are very encouraging and we are quite close to the industrial performance. I mean, the industrial average performance. For the HKC+, and we will make it into the production readiness by the middle of this year.
As you know, this 28-nanometer PolySiON high-k metal gate nodes are already a mature technology, and the pricing pressure is very high, and we see that ramping up this technology really matters with the challenges on gross margin. We are balancing the total volumes of this technology ramp-up with our target of a gross margin.
Yeah.
Okay.
Okay. I will comment a little bit about 14 nanometer progress. Since on board, we have concentrated much effort on FinFET development. I revised the FinFET plant, and now we have demonstrated good device performance in the year, meeting our internal target quite well. My confidence in our team's ability to deliver technology has vastly increased compared to four months ago when I first joined. I'm now confident in this team to deliver and even outperform the company's original R&D target.
Okay. If I could follow up just on the 28-nanometer, it reached above 10% of revenue. From this level, do you expect it to continue to sequentially ramp or maybe if you can give a magnitude of increase, if it will through the year or if there's any transition of FLP rolling off and so could stabilize, but if you could give that outlook on the revenue contribution.
Randy, as you know, we already have the customer there, and we already build up the capacity. In the meantime, I also met up with the pricing pressure. We will take very cautious pace in increasing the capacity. You know, SMIC is the latecomer in this 28 nanometer node, that's actually a good opportunity for SMIC to build up this technology to cater to multiple platforms. For example, 40 nanometer and the NOR flash, high-end NOR flash and the 20 nanometer are compatible running in the same fab. We do have the flexibility to adjust the loadings from different technology modes, 28 polysilicon, 28 HKC, 28 HKC+, and NOR flash, and the 40 nanometer logic and other applications.
Onto your questions that we'll maintain the customer needs and in the meantime, we take a very measured pace in maintaining this capacity expansion.
Your next question comes from the line of Leping Huang from CICC. Please go ahead.
Thank you. Take my question. [Foreign language] This is Leping Huang from CICC. I have a question to Dr. Liang. What's the major change of the SMIC after you joined the company and especially on the R&D organization? Thank you.
Okay, Dr. Huang. In order to have a breakthrough in the technology development ASAP, I made the organization more simple and complementary. With more resources focused on essentials that can deliver good value added and establish key technology milestones, make sure each member takes clear responsibilities and deliver promises on each target. I also revised the technology development methodology with faster learning cycle and more consolidated investments and resources in key platforms. Technology development should be oriented by customer product and take a high yield at production stage as the goal.
My confidence in our team's ability to deliver technology has vastly increased. I'm encouraged by the quick result of increased employee discipline, efficiency, and performance. In the past month, our team has increased the sense of ownership, accountability, and urgency. I'm now confident in this team to deliver and even outperform the company's original R&D target. Thank you, Gao. The second question from me is to Mr. Gao. I noticed that SMIC and the China IC Fund inject total, I think, $3.5 billion to SMIC South. What will be the timetable and the plan of this company? Thank you.
Okay. For this project, we call that SMIC South, and the overall funding for this program, the first stage would be $5 billion. The registered capital would be $3.5 billion. For SMIC, we will hold 50.1% of the shares, and the IC Fund and the Shanghai IC Fund will hold 49.9%. There is two timetables for your reference. For the end of June and the end of December of 2018, we will have injected capital for around $1 billion.
Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
Yeah. First of all, I guess a little clarification. Can you talk a little bit about what's behind the technology licensing? What exactly was sold? Your guidance for high single-digit revenue growth this year, does that include the technology licensing revenue? I guess if I backed out $150 million, maybe you're only guiding to about 3% revenue growth. Could you answer those two questions first?
Hi, Steven. Thank you for the question. We will form a joint venture with a partner without controlling rights and license our SMIC-owned specific niche technologies to the joint venture and to form a company. By doing that, we can fully leverage the local supports and also the investments on such niche technologies in the past many years inside SMIC. By doing the joint venture, we can make this company stronger and also help upgrade the local industry. In the meantime, we can gather resources to support our key central platforms inside SMIC. That's a very good opportunity for SMIC to do this. It's a new attempt for SMIC to fully utilize the investments on niche technologies in the history. Your second question?
Well, still to clarify on that.
Yeah
I understand that the technology licensing, you're selling technology, but what exactly is it for? Is it semiconductor design, manufacturing? Is it packaging related? Can you give us some more details behind that? My second question was just relative to your full year guidance of high single digits. Does it include this extra $150 million?
Okay. This technology, that is a niche technology, including from the device and the process technology manufacturing all the way to the back end. It's a low-demand mainstream technology . It's a niche market. That's the thing I can say at this moment.
Okay.
Yes. The answer to your question, yes. The whole year's guidance for the revenue growth, including that licensing income . Yes.
Okay. If I could just follow up with a quick one, I'll get back in the queue. On 28-nanometer, I guess I didn't catch a more concrete example. I understand that you're facing some pricing pressures there. You have some new technologies ramping. In the fourth quarter this year, looks like you did about $85 million-$90 million, maybe about $240 million for total 2017. What kind of growth rate do you think you're going to have in 28 nanometer in 2018? Maybe what do you think a year from today, fourth quarter this year, do you think you're going to be doing $150 million-$200 million a quarter? Help me understand how much 28 nanometer can contribute in 2018.
Just now, actually, I mentioned a little bit that first thing first, we already have the customer base. We already built out the capacity, this capacity got the flexibility to, and running back and forth with 40-nanometer and other niche technology platform. Like I mentioned, the NOR flash and the 40-nanometer logic type of things. Currently, we should say this way, 28-nanometer pricing got a great pressure and not that attractive. It impact our gross margin, we have to balance the move for more production ratio for this 28-nanometer. On the one hand side, we need to make sure that we satisfy the existing customers' requirements. In the meantime, we take very cautious way to move ahead for the further expansion and higher ratio.
we have to say that we maintain the current situation, in the meantime, waiting for better timing and, when we have a more diversified customer base and to make this technology nodes running production more healthy.
Your next question comes-
just now I also mentioned that, yes. just now I also mentioned that we will have the HKC+ coming into the production stage and in the middle of this year.
Your next question comes from the line of Charlie Chan from Morgan Stanley. Please flash your question.
Hi. Thanks for taking my question and happy Chinese New Year. First question, I guess is to Dr. Liang. You mentioned that the company seems to miss some opportunities from the China semiconductor demand, because of the readiness of technology. I guess part of that could be like Bitcoin ASIC because they use mostly in edge technology, right? Besides the Bitcoin ASICs, what kind of opportunities the company should capture, but you didn't get it because of technology issue? Can you clarify?
Okay. We target all the 14 nanometer FinFET technology in variety of applications. Mainly focus on high computing and low power segments.
Okay. Besides the 14 nanometer, what kind of business opportunity you didn't capture? I mean, for those 28 nanometer or trailing edge, for example, what semiconductor products you think you should monetize, but you don't have technology. Because from there we can understand your milestone and at what points you can reassess your top line growth.
That actually is quite complicate questions. To make it simple, since the semiconductor business and application dynamics is changing in the recently. For SMIC, we target our technology roadmap from HKC+ to the FinFET. This kind of technology migration, we hope to catch most of the consumer and not only the mobile applications, and other non-cost sensitive applications, yeah.
I guess my next question is regarding your 8-inch fab utilization because some of your industry peers like Vanguard, UMC are saying the 8-inch fab is pretty full, right? What is your fab utilization for 8-inch? I was thinking those fab-filler pieces like NOR flash, CMOS sensor can help your utilization in 1Q, but it seems like first quarter is still quite tough, right? Can you give us some color on your 8-inch fab business now?
Yes, I will refer his question to Dr. Zhao.
Okay, Charlie. For our 8-inch capacities and this kind of forecast, overall, we should say very good. You do see the forecast utilization for SMIC overall. We do not forecast that high. Mainly because for 8-inch, we also have the new wafer fab. You know that we announced that we build up new wafer fab in Shenzhen. That's a brand new fab. For that fab, they need time to qualify the existing platforms and existing customer product portfolios. That fab, while it is running up, the full utilization is not that good as the others. It's expected, and everything in line with our forecasting for that 8-inch fab. Overall, we should say SMIC 8-inch overall utilization is very good.
Another thing I can share with you is that SMIC, from historical point of view, we build up 8-inch 0.11 to 0.13 micron copper capacity there in order to satisfy customers' needs. We see the technology transition from 0.11, 0.13 technologies shift to 35 and 55 nanometer copper technologies. We do convert this copper capacity into aluminum capacity, that also takes some time of transition. Overall, we have the demand there. Yes.
Your next question comes from the.
Yes. Go ahead. Yes.
Thank you. Your next question comes from the line of Rex Wu from Jefferies. Please go ahead.
Thank you for taking my question. I just have one question about the 14 nanometer. Once SMIC fully ramps the technology, likely it will be kind of like a mature technology again. Can management explain a little bit, what's the competitive edge for SMIC's 14 nanometer platform? Thank you.
As they come in the market, we are using the most advanced tools. We can provide industry competitive 14 nanometer solution based on customers' latest request with high performance and low process costs. It will provide the customer with easy migration, various device integration, and full IP coverage. We target risk production will start in the first half next year.
Thank you. That's all my questions. Thank you.
Your next question comes from the line of Rick Hsu from Daiwa Securities. Please go ahead.
Hi, good morning, guys, thank you so much for taking my question. I got a question on your first quarter gross margin guidance, because this 25%-27% includes the license revenue. What is the apples-to-apples, if we exclude this license revenue, what would be your gross margin guidance for Q1?
Hi, Rick. Thank you for the question. Excluding this, you mentioned this license incomes from the joint venture, apple-to-apple to the first quarter, third quarter last year. For the first quarter, we should say we target 10%-12% type of gross margin.
10%-12%?
Yes.
Okay. Thank you. Yeah, thank you so much. The second question. I think Yonggang ran through this year's CapEx $1.9 billion breakdown, but I kind of missed this breakdown. Can you restate the breakdown again for this year's CapEx?
Okay. The planned 2018 capital expenditures for foundry operations are approximately $1.9 billion. Around 42% is for facility CapEx, mainly for our Shanghai and Tianjin new fab. The rest is mainly for equipment like our Beijing JV advanced nodes expansion, and upgrading tools, and also our Shanghai R&D tools.
Your next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Yeah, hi. Thanks for taking my questions. I just wanted to ask about the price pressure that you are seeing in 28-nanometer. What is your outlook for overall 28-nanometer once you kick in HKC and HKC+ towards the end of the year? Do you feel that the pricing will get better? Like any mature node, I think the pricing just keeps declining once the node becomes a certain level of maturity.
That's my first question. Second is on your progress on the leasing of assets instead of investing in CapEx. I think 2017 already, it feels like you have used a significant amount of leasing provisions on equipment. Could you talk about the application of this technique, for 2018 as well? It seems like it has not really changed the growth and depreciation. Should we expect that depreciation growth is still going to be pretty high, even if you're using a significant amount of leasing provisions on the CapEx side? Thanks.
Hi, Gokul. Thank you for the question. For the pricing pressure on 28-nanometer node, we believe we also sell. The reason is that 28-nanometer these days still cater to the major consumer applications and communication sector. That sector still maintains very competitive. Because the end market is so competitive, this kind of pressure transfers to the foundry suppliers. We believe they will be there. For SMIC, on one hand side, just now we said we'll maintain to meet customer's requirement. We already have the customer demand there. We already built up the capacity. We maintain running of this kind of capacity to meet our requirements. In the meantime, we improve our yield and lower our manufacturing cost. Then we also deliver new platforms, to be more competitive.
Just now we mentioned that by the middle of this year, we'll deliver the readiness of HKC+ platforms. Then we wait for more customers come in and see a better opportunity to ramp up further. That's a very cautious way. We keep emphasizing that we're balancing the volume of running 28-nanometer and with the targeting gross margins for overall SMIC. We keep having the adjustment back and forth. For the build capacity, just now I mentioned that we do have the flexibility to running through different technology nodes and different platforms. We can adjust that. Okay, about leasing.
Okay. Gokul, for this year, actually there is no managed leasing program so far. For last year, the total managed leasing came up with $885 million. According to this leasing program, actually we save our D&A by $2.26 million.
In 2018.
In 2018.
Okay. Got it. Thank you.
Your next question comes from the line of Bill Lu from UBS. Please go ahead.
Hi, good morning. Two questions. Management talked about risk production for 14 nanometers in the first half of 2019. Can you talk about what that means for capital spending? When do you have to start spending for 14 nanometers? I'm just wondering if you look at this year's CapEx is down from 2017, should we model a ramp in 2019, or can you do a small light start?
Okay. Hey, Bill. Actually, as we announced our SMIC South project, it's particularly designed for our 14 nanometer FinFET. Actually, our target for 2018 is to complete all the shelves and the clean room set up. For 2019, the CapEx were primarily for our equipment CapEx. So far, we don't have a clear timeline for all these stuffs.
Okay. Without giving me a CapEx number for 2019, can you help me a little bit with how much capacity you will have for 14 nanometers in 2019?
Hi, Bill. We have the R&D facilities at this moment that reach a certain type of capacity number already at this moment. At the first stage for 0.95, we'll use the immersion scanners quantity to define the pace. That'll be roughly about 3,500 wafer per month, 6,000 wafer per month, and go for 9,000 wafer per month. There will be 3 stage. At this moment, we do have 3,500 per month capacity for R&D.
Great. Thank you.
Yeah.
Could I just follow up on Gokul's question? If you look at the pricing pressure on 28 nanometers, is it just as severe for HKC as it is for Poly, or are you seeing a difference?
Actually, we see them both. PolySiON is a relatively simple version. They have fewer layers in the whole process. High-k metal gate, they have more process layers. Overall per layer we saw similar things. The pressure, to your questions that the pressure actually on both platforms. That's the market. That's the market overall, not specific to SMIC. I really believe that we are running market.
Your next question comes from the line of Roland Shu from Citigroup. Please ask your question.
Hi. Good morning. Thanks for taking my question. First question is for your first quarter gross margin guidance. If we exclude this one-time technology license revenue, you said that will be about 10%-12%. We know at least probably it's due to this lower utilization and the product mix change and even from the higher depreciation. I would like to know how high the depreciation will it be for this first quarter gross margin, lower first quarter gross margin. On the depreciation point of view.
On the first quarter, we see 6% more depreciation added to the cost. Without this item, we can easily calculate what the gross margin should be given the facts.
6% higher depreciation means an absolute dollar amount compared to the Q-.
Compared to the previous quarter. Yes.
Okay.
Yes.
How about the full year, the whole year 2018, the depreciation will be? Okay. Thank you.
For the whole year, the overall depreciation will increase around 15% compared to 2017.
Okay. Thank you. Haijun said the whole year 2018 gross margin target will be about teens percentage point. I would like to know, is this low teens or mid-teens or high teens?
Actually, at this moment, we do not have the good visibility for the whole year, we could not say very confidently for the detailed numbers.
Is it more close to first quarter gross margin or it will be better than first quarter gross margin?
Yes.
Of course, we hope that on the quarter by quarter it's getting better and better.
Okay.
Yeah.
Cool. Second question. Your auto and industrial revenue actually doubled last year. How about this year? Will it also look to be double again? How about your non-flash and CMOS image sensor revenue contribution last year and also your expectation for this year? Thank you.
Definitely grow and, well, I do not have exactly the calculation there, whether or not it will double again, but there will be a significant increase in the revenue from these two platforms. You know another thing is that we do not comment too much on a single product. Definitely grow further.
That's all the time we have for question and answer session. I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.
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 fourth quarter earnings call. We thank you for joining us today.