Ladies and gentlemen, welcome to the Semiconductor Manufacturing International Corporation's third quarter 2016 webcast conference call. Today's conference call is hosted by Dr. T.Y. Chiu, Chief Executive Officer, Dr. Yonggang Gao, Chief Financial Officer, Mr. Gareth Kung, Executive Vice President of Strategic Business Development, Finance, and Company Secretary, and Mr. En-Ling Feng, Vice President of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet at SMIC's website. Please be advised that your dial-ins are in listen-only mode. At the conclusion of the management's presentation, we will be having a question and answer session, at which time you will receive further instructions as how to participate. The earnings press release is available for download at www.smic.com. Webcast playback will also be available approximately one hour after the event at www.smic.com.
Without further ado, I would like to introduce you to Mr. En-Ling Feng, Vice President of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's third quarter 2016 earnings webcast conference call. For today's call, our CEO, Dr. T.Y. Chiu, will first provide some general remarks. Afterwards, our CFO, Dr. Gao Yonggang, will highlight our financial performance and give guidance on the next quarter. Our Executive VP of Strategic Business Development, Finance, and Company Secretary, Mr. Gareth Kung, will give the detailed financial commentary. This will then be followed by our Q&A session. As usual, our call will be approximately 60 minutes in length. The earnings press release and quarterly financial presentation are available for you to download at our website under Investor Relations in the Events and Presentations section. Before I turn the call over to Dr. T.Y. Chiu, let me 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 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 25th, 2016. 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 US dollars, unless otherwise stated. I will now turn the call over to our CEO, Dr. T.Y. Chiu, for the opening remarks.
Thank you, En-Ling. Greetings to everyone. Thank you for joining us. 2016 has been an exciting year this far for SMIC, marked by robust customer demand, growth, and good execution of our strategy. Over the past two years, SMIC's utilization and growth rate have exceeded the global foundry industry, and we target to outpace the industry in the next few years. We maintain our drive to grow profitably, execute precisely, and expand value for our stakeholders. We are still experiencing robust demand from various regions, applications, and technology nodes. We are addressing the demand opportunities by laying the foundation for continued growth with prudent expansion to meet our customers' demand. I am very pleased to announce our excellent third quarter results, which have been the results of our team's strategy, execution, and expanding position in China market.
We had our seventh consecutive quarters of revenue growth and 18th consecutive quarters of profitability. Our revenue was a record high of $774.8 million, representing a growth of 36% year-over-year and 12.3% quarter-over-quarter. Our net profit attributable to SMIC was also a record high of $113.6 million, a growth of 37.4% year-over-year and 16.3% quarter-over-quarter. This marks the first time our quarterly net profit exceeds $100 million. The second consecutive quarter to have ROE exceeding 10%. We are also happy to report that our 28 shipment exceeded $10 million, accounting for 1.4% of revenue. Furthermore, we are guiding another strong Q4. Q4 is targeted to grow at 5%-7% quarter-over-quarter. For the moment, 2016 annual revenue is targeted to grow more than 28% year-over-year.
Moreover, with our current visibility, we see continued growth in Q1, which would represent our 10th consecutive quarters of growth. We maintain the target to grow at an annual compound rate of 20% from 2016 to 2019. Meanwhile, we expand capacity carefully with preparation in the pipeline to meet our customers' demand. Analyzing our growth from a regional perspective, all regions grew healthily in the third quarter, beginning with China, where revenue grew 46.5% year-over-year and 11.2% quarter-over-quarter. North America grew 13.6% year-over-year and 20% quarter-over-quarter. Eurasia grew 50% year-over-year and 5.2% quarter-over-quarter. On 28 nanometer, we nearly tripled revenue to more than $10 million, representing 1.4% wafer contribution in Q3. Our 28 revenue is set to double again in Q4.
We believe that our flexible 28/40 nano capacity strategy has enabled us to best serve our customers and utilize our fabs in a profitable manner. 40 nanometer grew 11.3% quarter-over-quarter, and we see 40 nano demand from our customers continue to be strong into next year with new products taping out. 65/55 nanometer demand has also far exceeded our current capacity, growing at 30% year-over-year and 15% quarter-over-quarter. We are therefore adding additional 65/55 capacity in our Beijing B1 fab and initiating a new 12-inch fab in Shenzhen to meet expanding demand in 55 nanometer. 0.13 micron grew at 58.8% year-over-year and 46.8% quarter-over-quarter, with new contribution from LFoundry in this area. 0.18 micron technology grew 20% year-over-year and 3.2% quarter to quarter from existing and new customers ramping in PMIC and sensors.
We continue to broaden and diversify our technology offerings. Our collaborations with customers on various phone components, IoT, auto, AR/VR, and industrial applications will propel SMIC's growth into the future. To address the robust demand at hand for new and existing products, we are increasing this year's CapEx for foundry operation from $2.5 billion to $2.6 billion. This increment is primarily for secondhand 55 nano tool. We believe this year's CapEx intensity as a percentage of revenue is at a peak and will come down in subsequent years. Beijing JV 12-inch fab will have a total installed capacity of 18,000 by year-end. We are expanding Beijing 12-inch fab for the mature technology to around 45,000 wafer by the end of the year. In addition, we have secured a significant amount of secondhand equipment for additional 55 capacity to be installed in our recently announced Shenzhen 12-inch fab.
Shenzhen 8-inch fab ran smoothly and will be at 31,000 per month 8-inch by year end. LFoundry is now fully consolidated financially with 40,000 8-inch capacity. We are investing additional CapEx in LFoundry to enable SMIC's technology transfer and expand LFoundry's capability. In the past few years, SMIC was able to respond to market opportunity due to availability of unused clean room. Without this available space, our growth would have been constrained significantly. As the available clean room is now quickly being depleted, we are now preparing new fabs for the next phase of growth. In the last month, we announced several new fabs construction projects to address our diverse future demand. For 8-inch, we are building SMIC Tianjin.
For mature 12-inch, namely 65, 55, we are currently outfitting the clean room for SMIC Shenzhen 12-inch project, for which we have already secured a significant amount of the secondhand tools. We are preparing a new facility on our Shanghai campus for the most advanced technology. These are the fab construction phase and the actual production capacity will only be executed with careful planning to meet overlapping conditions of assured demand, technological readiness, and sustained profitability. With targets on growth, capacity, and technology, ultimately, our team's goal is to create value for our stakeholders. In Q3, our quarterly ROE reached 11.4% from 10.2% last quarter as compared to 9.3% Q3 of last year. We continue to aim to achieve double-digit ROE on a sustained basis. Secondly, we increase value through improved cash generation. EBITDA grew 11.3% quarter-over-quarter and 47.6% year-over-year.
EBITDA in 2016 is targeted to surpass $1 billion for the first time. We aim for low-cost funding and the minimum share dilution. It is our preference to fund with straight debt. In addition, with new fab in the horizon, we hope to continue to take advantage of JV partnership for the expansion of advanced logic fabs, such as our Beijing JV. We announced recently our intention to consolidate shares. We believe the consolidation will help to reduce the volatility and enhance the liquidity of SMIC stock, making it more attractive to a broader range of investors. In conclusion, SMIC is seeing robust demand across the board, and we reiterate our growth target of 20% compounded annual growth from 2016 to 2019. In 2016, SMIC is growing in excess of 28% year-over-year.
We are forecasting growth for both Q4 2016 and Q1 2017 as well, given our current visibility. We are on track to achieve another record year of revenue and net profit attributable to SMIC. We have depleted our available clean room and are prudently preparing for the next phase of growth with new civil construction. We are working to bring growth opportunity in China to the global semiconductor industry as in LFoundry Avezzano, Italy, and striving to serve customers worldwide. SMIC is vigilant in balancing profitability, growth, building shareholder value, and serving our customers for the benefit of all stakeholders. We appreciate your ongoing support and thank you for your time. I now hand the call over to Yonggang for the financial highlight and 2016 Q4 guidance.
Thank you, T.Y. Greetings to all our listeners. I will highlight our last quarter results first and then give our fourth quarter 2016 guidance. Our revenue, gross profits, and net profits were all record highs. Revenue was $775 million, an increase of 12.3% quarter-over-quarter, exceeding our guidance, 8%-11% growth increase. Gross profit was $232 million. Gross margin was 30%, at the high end of guidance range from 28%-30%. Profit for the period attributable to SMIC was $140 million. Now look ahead into fourth quarter of 2016. Our revenue is expected to increase by 5%-7% quarter-over-quarter. Gross margin is expected to range from 28%-30%. non-GAAP operating expenses are expected to range from $179 million-$184 million.
The non-controlling interests to our majority-owned subsidiaries are expected to range from positive $37 million to positive $39 million, which are losses rebound by non-controlling interests. Our planned 2016 capital expenditures for foundry operations are up from approximately $2.5 billion to approximately $2.6 billion. The increase is mainly for the acquisition of used equipment for Shenzhen new 12-inch fab. I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gao-zūn , and thank you everyone for joining us today. I will now comment on the details of our last quarter financial results. On the income statement, revenue increased to $775 million, above the guided range, mainly because of the increase in wafer shipments, and the revenue contribution from the acquisition of LFoundry. Cost of sales increased to $543 million. Gross margin was 30% at the high end of the guided range, but declined slightly from 31.6% in Q2 2016. Mainly due to, first, the receipt of insurance compensation in Q2 2016, and 2, the acquisition of LFoundry in Q3 2016. Operating expenses increased to $124 million in Q3 2016. R&D expenses increased by $17.4 million, Q-on-Q to $82 million. The change was mainly due to high level of R&D activities. Funding of R&D contract from government was $9.6 million in Q3 2016.
Excluding the effect of employee bonus accrual, government funding, and gain from disposal of living quarters, non-GAAP operating expenses were $121 million in Q3 2016. Profit from operation was $109 million. Profit for the period attributable to SMIC increased to $114 million, while non-controlling interests were $1.4 million of credit to SMIC's attributable profit in Q3 2016. If excluding the impact of finance cost, depreciation and amortizations, and income tax expense, our EBITDA margin was 38.7% in Q3 2016. Moving to the balance sheet. At the end of the third quarter 2016, cash and cash equivalents increased to $1.63 billion. If including our financial assets, we had approximately $1.8 billion cash on hand at the end of Q3 2016. Our total debt increased to $2.9 billion in Q3 2016 compared to $2.5 billion in the previous quarter.
At the end of Q3 2016, our gross debt to equity ratio was 54.7%. Our net debt to equity ratio was 21.3%. In terms of cash flow, we generated $200 million of cash from operating activities. Cash used in investing activities decreased to $688 million. Cash from financing activities was $539 million. To examine our revenue by application, the communication and consumer segments contributed 46.1% and 40.7% of our revenue respectively. Geographically, revenue from China, North America, and Euro-Asia contributed 51.6%, 20.3%, and 20.1% of total revenue respectively. In terms of technology, revenue from 28 nanometers contributed 1.4%, revenue from 40/45 nanometers contributed 22.6%, and revenue from 55/65 nanometers and 90 nanometers contributed 20.8% and 2.2% respectively. Meanwhile, 0.13 micron and above line width contributed 53% of our wafer revenue.
In terms of our overall capacity, total monthly capacity at the end of the third quarter increased to 391,000 eight-inch equivalent wafers, an increase of 15% Q-on-Q. The change was mainly because of the capacity expansion in our Shanghai eight-inch fab, Shenzhen eight-inch fab, Beijing 12-inch mega fab, and our majority-owned Beijing 12-inch fab, as well as the acquisition of LFoundry in Q3 2016. Our planned 2016 capital expenditure for the foundry operations are approximately $2.6 billion, an increase from $2.5 billion, based on an early estimate. The increase is mainly for the acquisition of used tools for the Shenzhen new 12-inch fab. I will now hand the call back to En-Ling for the Q&A session.
Thank you, Gareth. 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, at this time, if you want to ask a question, please press star one on your telephone and wait for your name to be announced. If you want to cancel your request, please press the pound or hash key. The first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yeah, thank you. Good results. I wanted to ask the first question about the fab plans and the CapEx. If you could give an initial view on 2017 CapEx and how that split of funding would be between operations, the JV partners, or debt. Also, if you would consider the leasing company for a portion of that CapEx. Then if you could talk a bit about the priorities for the fabs, for the build out between the different fabs you've announced.
Okay, Randy. Right now, we are still working on the 2017 budget, so we cannot say for sure in terms of the CapEx next year. As mentioned in T.Y.'s script, we do expect the CapEx next year in terms of intensity will definitely come down. Our feeling is that most certainly the CapEx will be at or below current year level. In terms of source of funding, I think we are in a very comfortable situation. We have a net debt to equity of about 25%. We have room to leverage to continue to fund our expansion with debt.
Okay. As far as the priority of the capacity expansion, I think firstly is our Beijing JV fab. We are still expanding our capacity to address our customer demand in 40 as well as 28. That's one thing. The second one is to expand our 55 nano capacity, which is also we will adding additional 5,000 of capacity in our Beijing fab one, which is wholly SMIC owned. In addition, we are still expanding our 8-inch capacity, which will be in Shenzhen next year. At the end of the year, we will start to set up and pilot our Shenzhen 12-inch mature fab, which will address the very strong demand in the 65/55 area.
Another important effort is to add additional capability in LFoundry, and so that we can transfer additional loading into LFoundry, since there are a lot of customer interest to use that particular fab.
Okay. Thank you. One quick follow-up for the funding, if you expect much use of the leasing company or you'll still evaluate that? The second question I wanted to ask was on the growth drivers as you look out over the next year. If you think it's similar drivers to what drove this year in terms of the 8-inch and then what on 40 and 55. If you could expand a bit, it sounds like you're getting a lot more aggressive on the 55/65 nanometer. The applications that are driving that node for the aggressive expansion there.
Okay, first of all, as far as the leasing is concerned, at this moment, SMIC has very minimal leasing program. Indeed, we have only very small program in our testing house that we do use leasing, very small amount. We are looking at that particular option, but only if that really brings in significant economic advantage to SMIC as well as our customers. This is, at the moment, still under a lot of scrutiny. Yes, we are studying it.
Growth drivers.
The growth driver for 55. We see a lot of interest in our new technology, the ultra-low power, as well as our present process for connectivity. As for the low power, it will be for the IoT. The rest of the applications is in connectivity, TV, and set-top box, as well as the RF.
Great. If I could ask just for beyond the broader growth drivers for next year, if you see any expanding out. This year grew high 20s, and I think was on some of those areas in consumer, plus 8-inch, the fingerprint and power management. If you see any kind of new things emerging as you look out or if it's similar drivers for next year.
Could you say that again? I didn't quite catch it. Yeah.
I was just asking for your growth drivers. This year.
Okay.
saw a lot from the sensors and then also on the 12-inch on some of these consumer and connectivity, if you see some new growth drivers emerging?
Yeah. Okay.
to maintain that 20% CAGR.
Yes. Definitely. A lot of the present customers are coming in with new products, we are seeing also new area in sensors, especially in CIS, that is showing a lot of interest in 12-inch capacity.
Great. Thank you.
Thank you, Randy.
Next question comes from the line of Sebastian Hou from CLSA. Please go ahead.
Hi. Thanks for taking my question. My first question is on 28 nanometers. Congratulations on finally you reached over 1% of the total revenue contribution in the quarter. I think T.Y. also guided for this revenue to double in 4Q. If my math is right, that would probably account for 3% of the total revenue. Can you give us more colors on what type of application it is, and how do you see the ramping curve into 2017? How the profitability of that?
Okay. The applications is still in a lot of the communication mobile phone area. We are also seeing some other such as the AP. I think that it can still ramp very strongly. Right now, we are still in our advanced technology area, capacity limited. That's why we are still targeting to build our Beijing JV as our priority CapEx. Does that answer you?
Yes, mostly. T.Y., can I get more your thoughts on, in 4Q, probably around 3% total revenue contribution. How about for next year? Say, by the end of next year, do you see that 28 will account for, let's say, more than 10% of the revenue?
Right now, it's difficult to project because it definitely depends on the CapEx that we intend to dispense. In addition, it also depends a balancing between the 40 nano demand as well as our 20 nano demand. We think it does have a potential to ramp significantly.
Okay. In terms of the profitability, or I assume maybe the new process usually carry lower than corporate average margins. Do you see the chance that when it ramps more aggressively in 2017, how do you see that impact your overall gross margin?
I think that that apply to every technology. As we first do the initial ramp, usually the profitability is low. As we bring the node to a more economic scale, we do expect the profitability to improve.
Okay. My second question is more on the 65, 55 nanometers. I think earlier, your prepared remarks, you talked about that you're going to already secure a lot of secondhand equipment on this one. I think probably in the first, and you're going to need build a new Shenzhen Fab to do that. Probably, you see the great demand right now for the next few years. How do you see to monetize that in, let's say, two to four years or longer-term perspective? Because presumably, some of the, or majority of the customer there will probably migrate to 40 nanometers. Particularly when Tzu-Yin Chiu talk about the application is like set-top box, TV, RF. Based on my understanding, a lot of that already manufacture at 40 nanometers right now.
How do you see to monetize that, and how do you see that kind of impact, let's say three, four years beyond when those customer migrate to 40? Will those 55, 65 nanometers capacity become idle?
Okay. The decision to build 65, 55 is made with a lot of consultation with our customers and market surveys. We believe that there is certain sectors of the market, even in the Wi-Fi, that will always be using 65, 55. We are quite confident that this particular node will see a lot of application, especially when IoT is ramping up. Secondly, we are also looking into new applications, such as various sensors as well as drivers. These are areas that have a huge demand for capacities, and we see that there is a lot of future potential for this particular technology node.
Thank you. Just one follow-up on what you just mentioned, T.Y. You mentioned about your application include driver. Is that driver IC?
Yes, especially the AMOLED drivers.
Okay, got it. Thank you.
Thank you for the questions. Next question comes from the line of Steven Pelayo from HSBC. Please go ahead.
Yeah. Great, guys. Let's start, I guess, with depreciation. Obviously, it's stepping up each quarter here. What does it look like for the fourth quarter and then for 2017?
We are still keeping the guidance for depreciation for this year. For the whole year, we are still expecting around about $735 million, being the whole year. You could see there's some step-up in Q4. For next year, as what we mentioned earlier, we're still working on the planning. We do not guide for next year depreciation at this point in time. Yeah.
I guess I just want to make sure there isn't a step function in the first quarter coming as far as we know. Is there?
I think given our expansion trend in the last two years, you're going to see some increase. Yeah.
Okay. Another question on the OpEx guidance. I guess you said kind of on a non-GAAP basis, adding back in the R&D credit there was about $123 million, and now you're guiding over $180 million, it looks like, at the midpoint. What's going on in OpEx, and could you also address your full-year expectations for R&D credits as potential offsets there as well?
Yes. We are guiding the non-GAAP OpEx to go up in Q4. First of all, Q3 was low for some reasons. For example, we have recovered about $10 million [DFO] debt in Q3. That actually reduced the number for Q3. In Q4, we are looking at some increase in both R&D and also in the G&A area. For R&D, it means because, as you know, we have some government projects to work on, and many of these projects will come to completion in Q4. You're going to see some step-up in the R&D expenses. At the same time, you're going to see some step-up in the R&D funding. We could talk more about it later on. Secondly, for the G&A expenses, there are also some increase because of various reasons. Some consulting fees, some indirect taxes, and some stock option expenses.
Which is why we are guiding up the non-GAAP OpEx. In terms of R&D funding, we are forecasting for whole year to be about $65 million-$67 million, and which is working out to be about in the $37 million-$38 million range in Q4.
$37 million, $38 million on the fourth quarter. Okay. I just want to clarify, last quick question. I want to clarify. Before you had said capital intensity is going or it's peaking now, that goes down as a percentage of sales. I think you answered Randy's question about CapEx being lower year-on-year. I want to make sure, were you talking about intensity again there? Or were you talking about dollars being lower next year?
First of all, we are very certain about the capital intensity is going to come down, okay? Because we do expect our revenue to continue to grow, okay? In terms of the absolute amount of CapEx, as I say, right now, we are not giving any guidance for next year. Our feeling is that probably, the CapEx will remain around the same level or slightly below.
What kind of capacity increase do you think a year from today that's going to get you?
Is that number four question? Steve, is that number four question?
That's all right. Randy has four questions as well. I'm sneaking one in.
Okay. I think, because as Tzu-Yin have said that we are going to forecast about 20% growth year-on-year in the next two, three years. You're going to see the capacity going to grow in line with our growth in the revenue projections.
Okay. Excellent, guys. Thanks a lot.
Thank you.
Thank you.
Thank you for the question. Next question comes from the line of Roland Shu from Citigroup. Please go ahead.
Hi, good morning. First question is, you expect for first quarter next year will be continuing a growing quarter based on your current visibility. However, compared to Vanguard's two months order visibility. What kind of the demand over you such longer visibility, and how confident you are for this long visibility?
Yeah, I think partly because actually our fab are very full right now. We do have a very long backlog in terms of serving our customers. They give us a longer visibility, in terms of the customer demand. I think for Q1, we are very confident that the revenue go up. I think, as you rightly said, we are still in the process of collecting demands from our customers. We are not giving any precise guidance.
Yeah, you are still very confident about the revenue in Q1, definitely will be go up, right?
Yes.
Okay. This is also in, I think a part of this follow-up question. UMC is using lower price to get more eight-inch business. Also, I look at TSMC. TSMC this year, its eight-inch revenue is declining. I think that means that you continue build your eight-inch capacity, also you continue growing your eight-inch revenue. What will continue driving the trends going forward for your eight-inch business?
Okay. The eight-inch, indeed, we still see very strong demand in the Bluetooth and some consumer area. Also, chemical power management, as well as sensors.
We continue also to see new application, especially requiring low-powered applications. I think that is mostly probably going for the IoT market.
I think that the strength of our eight-inch business have been around for about two years. I think that is really our attribute to the strength of our China market position, as well as I think the R&D work we have done in the past few years in terms of differentiating our technology.
Okay. For next year, are you going to continue build eight-inch capacity, and any risk for this continued increase for eight-inch capacity going forward?
Yeah. We continue to expand our Shenzhen eight-inch fab to add about 10,000 wafer to Shenzhen. We are also trying to optimize our LFoundry capability as well as its capacity so that it can receive a lot of customers who would like to use LFoundry capacity.
Okay. Yeah. Understood. Thank you. Okay. Second question, just for you. You are now building your
Third question
new 12-inch fab. Okay, this will be very short. Yeah. What is depreciation year for your new 12-inch fab capacity in Shenzhen? Thank you.
I think for the new 12-inch fab in Shenzhen, I think the impact for depreciation this year will be very small because first of all, we are planning only for middle line this stage. Secondly, based on the current schedule, the middle line next year will only be up and running towards end of the year.
Mm-hmm. For the depreciation period, how long will it be? For five years or seven years?
For our 12-inch line, our normal depreciation is for seven years.
Okay. This one will be the same, right?
Yes.
Okay. Thank you.
Thank you for the questions. Next question comes from the line of Gokul Hariharan from JP Morgan. Please go ahead.
Yeah. Hi. Thanks for taking my questions. Great quarter as well. A couple of questions. First of all, could you comment a bit on the profitability trends? I think this year gross margin has held up very well even with the increase in depreciations. More 12-inch investments coming through. How should we think about profitability going into the next couple of years, and also next year, given that utilization is already pretty close to 100% and there is a fair bit of 12-inch as well as 28 nanometer coming in? Maybe you could address it both from maybe a gross margin perspective as well as maybe an EBITDA perspective stripping out the depreciation expenses. Thanks.
I think the key for the profitability, as in all foundries, still utilization. Okay. As we expand our fab, our strategy was to keep our fab fully loaded. This is point number one. Secondly, as we expand our new fabs, over time this fab will come to what we call economy scale operations. Hopefully that would be positive to our overall profitability. At the same time, as you rightly point out, our depreciation is likely to go up next year because of expansion that we have undertaken in the last few years. Now you have different impacts that will impact profitability next year. I think from our point of view, the key is still maintaining high utilization.
Is it fair to say you're confident that staying around this high 20s, 30% level, even with the depreciation jump that we've got next year, as long as utilization stays relatively high?
It is always our management intention to keep high profitability.
Okay. Second question on the funding. I think, Gareth, you mentioned you're primarily seeking debt funding. Could you talk a little bit about the financing plan for next year? Looks like there is still going to be a little bit of a gap in terms of your EBITDA versus the CapEx. Is it going to be almost 100% debt funding for next year? Do you have visibility into that at this point?
What happened is that, as we mentioned in our script, we are fairly comfortable in terms of funding. We have about $1.8 billion cash on hand right now. We could generate next year, I'm sure more than $1 billion from EBITDA, okay? At the same time, don't forget a big part of our CapEx next year will still be for our joint venture fab in Beijing. That will be 49% funded through our joint venture partners. Our intention is continuing to fund it through strict debt.
Okay. That's all. Thank you.
Thank you.
Thank you for the questions. Next questions comes from the line of Charlie Chan from Morgan Stanley. Please go ahead.
Hi, congratulations for great results. My first question is on your growth drivers. Apparently you're outgrowing your industry peers, especially in the edge business. I want to clarify that your outgrowth comes from your position to China domestic customers, or are you also getting more outsourcing from foreign companies as well? Thanks.
I think that in all areas, we are growing. As I reported, we see revenue growth in all areas. Perhaps there are a stronger growth year-over-year in China as well as in Europe. We think this year, with our 28 ramping up, the U.S. revenue will also be very strong. I think this is not a single region or single technology growth.
Okay. Fundamentally, I can understand that your outgrowth coming from China local customers. For you to gain more market share from foreign companies, what would be SMIC's advantage?
For example, I think some of our customers, even in the overseas areas that have been working with us for a long time on certain sensors, and I think we have provided them with great service and great technology. They were able to grow tremendously over the last few years. I think that we have grown, we have proved that we are able to serve our customer well. At this moment, even in all regions, there are lots of interest
From the new customers that are trying SMIC's technologies. I can give several example. Some of the touch sensors, some of them are just drivers. These are areas which SMIC does not have a large presence in the past, and I think that our customers are very promising customers with a lot of potential to expand in China.
Yeah, just to give you an indication about the spread of our customers. If you look at our top five customers in Q3, we have three from U.S., one from China and one from Europe. We are very well diversified customers base that we are working for. Yeah.
Thanks. That's very helpful. My second question is on the supply side. It seems like, to me, your key risk to the growth is really how are you going to able to source more secondhand tools for those 12-inch, no matter inch tools or 65 nanometer tools. Do you think that is a risk, and how company can ensure sustainable supply from those secondhand tools?
Certainly, there is always some risk to sourcing. We have a combination of secondhand tools, and we have steady partners in some of these big companies who are upgrading their manufacturing into more advanced technology. In addition, we are also sourcing some of the new tools from the original equipment suppliers. In addition, we also have access to domestic equipment vendors that can really very well address the mature technology part. I think we have proven in our very smooth and quick ramp-up in Shenzhen that we have access to a combination of equipments. I think we are relatively confident that we can do this job quite well.
Okay, understood. I think it's very impressive you can source those tools and monetize from those secondhand tools that your industry peer cannot. Congratulations again. Thanks.
Thank you.
Thank you.
Our next question comes from the line of Ken Hui from Huatai. Please go ahead.
Thank you for taking my question. I will direct my question to Chiu. The first question is, I think Tsinghua has accumulate over 8% of a stake in SMIC. Any comments on that? Any collaboration with the company that you are discussing? That is my first question. Thank you.
Okay. As far as we know that they have purchased between 5% to 6% of SMIC stock. This comes as also quite a bit of a surprise recently. I think that we believe this is a confirmation of our performance, and there are lots of investors who have come in touch with our investor relation department that show interest. As far as having a discussions with Tsinghua Unigroup, there was no discussions or no invitation for them to come in. We intend to keep SMIC a independent and international company. This is our consensus among our management as well as our investors. We welcome investments from all investors, but our overall strategy and commitment is to be a independent and international pure foundry company.
Thank you very much. My second question is related to the fingerprint business. This is some of the growth driver for this year, but I think there's this news report that your key customer is trying to diversify its foundry supplier. At the same time, there are also a numbers of other foundries, Samsung, Vanguard, they're also trying to get into this area. Are you concerned about more competition in this particular area, or the contribution is not that significant that you are not concerned at all? Thank you.
I think in this industry, competition is definitely everywhere. I think competition is good for the industry. SMIC in the past was able to support our customer to growth tremendously. I think we still remain the primary vendors for the fingerprint. We are also getting a lot of other fingerprint customers that are showing interest in using SMIC technology. I think that we are still very comfortable with our 8-inch capacity loading, and we intend to be a strong player in this area.
Okay. Thank you very much.
Thank you.
Thank you. Last question comes from the line of Halsey Xie from Goldman Sachs. Please go ahead. Unfortunately, the line has disconnected. There are no further question at this time. I would like to hand the call back to Mr. Chiu for closing.
Thank you. In closing, I would like to thank everyone who participated in today's call, and again, thank all of our shareholders, customers, employees, and suppliers for their trust and support. We'll see you next quarters. Thank you.
Thank you, ladies and gentlemen. That concludes the conference call for today. Thank you for your participation. You may now disconnect the lines.