Welcome to the Semiconductor Manufacturing International Corporation's First Quarter 2016 Webcast Conference Call. Today's conference call is hosted by Doctor. T. Y. Chu, Chief Executive Officer Doctor.
Yonggang Gao, Chief Financial Officer Mr. Gareth Kung, Executive Vice President of Project Business Development, Finance and Company Secretary and Mr. An Lin 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.
However, at the conclusion of the management presentation, we will be having a question and answer session, at which time The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately 1 hour after the event at www.smics.com. Without further ado, I would now like to introduce to you Mr. An Lin Feng, Vice President of Investor Relations for the cautionary statement.
Good morning and good evening. Welcome to SMIC's Q1 2016 earnings webcast conference call. For today's call, our CEO, Doctor. T. Y.
Chu, will first provide some general remarks. Afterwards, our CFO, Doctor. Gao Yonggang, will highlight our financial performance and give guidance on the next quarter. And then our Executive VP of Strategic Business Development, Finance and Company Secretary, Mr. Gareth Gong, will give the detailed financial commentary.
This will then be followed by our Q and A session. As usual, our call will be approximately 60 minutes in length. The earnings press release and the quarterly financial presentation are available for you to download at www.smics dotcom under Investor Relations in the Events and Presentations section. Before I turn the call over to Doctor. T.
Y. Chu, 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 the financial condition, please see our filings and the 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 as Securities and Exchange Commission on April 25, 2016. During the call, we will make reference to financial measures that do not conform to General 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'll be discussing.
Please note that all currency figures are in U. S. Dollars unless otherwise stated. I will now turn the call over to our CEO, Doctor. DY Qiu for the opening remarks.
Thank you, Ernie. Greetings to everyone and thank you for joining us for this quarter's call. Q1 was another quarter of record high revenue and 16 consecutive quarters of profitability. We continue to experience increasing demand, purchasing order from our customers continue to strengthen and are being driven by our diversified products and customer exposures, which commence full utilization of all our fabs, including the newly ramping facilities. We now target to grow more than 20% this year given the present demand upturn.
We are witnessing customer market share gain and their demand for more capacity stretched beyond our present expansion plan. We are confident in our customer partnership and our execution on quality, service and technology, which enable us to continue to capture many of the growth potentials in China and globally in the years to come. The Q1 of 2016 was another great quarter for SMIC. We surpassed industry's average revenue growth and expanded more than 24% year over year and 4% quarter over quarter on a seasonably weaker quarter and exceeded our guidance of 1% to 3% quarter over quarter growth. Our flexible 2,840 capacity has enabled us to address our customers' production ramp and revenue from 40 nanometer and below expanded 64.9% year over year and 26.4% quarter over quarter.
We anticipate revenue from 40 nanometer and below continue to more than double in Q4 this year compared to Q4 last year. With new capacity in Shenzhen ramping, overall wafer revenue from 0.13 microns and above grew 29 percent year over year and 4.8% quarter over quarter. Overall utilization was 99% in the Q1, including the newly ramping fabs. Apart from continuous strength in our overall product mix, there was increased demand in consumer application in the Q1 from television and the set top box related applications. Having successfully demonstrated full 16 consecutive quarters of profitability and consistent customer demand increase.
We are now targeting to expedite revenue growth and build manufacturing scale. With today's momentum, we target to achieve an annual revenue growth of 20% during the next 3 to 4 years. In the meantime, our commitment to growth and the profitability remains solid. Our strategy to fully utilize our investment, differentiate and diversify our product mix and advanced technology developments still are being carefully executed. Our strategy to build manufacturing skill is well supported by our China positioning.
Being in China has presented us with many opportunities, customers and relationships. China's semiconductor market has a growth rate higher than the global average. Many customers, domestic and international, prefer to have a foundry partner located in China due to market and customer proximity. Our China revenue contribution grew 7.4% quarter over quarter and 24.8 percent year over year. Meanwhile, Eurasia revenue contribution also grew at 9% quarter over quarter and 145% year over year.
Given our high utilization and the strong customer demand, We continue to strive to improve operational efficiency and expand our capacity. We have adjusted our CapEx from $2,100,000,000 upward to $2,500,000,000 dollars and we will use every dollar wisely. Our past record show that we can generate $1 revenue per $3 investment, and we continue to target at this rate of capital efficiency. This additional CapEx is primary for additional capacity in Beijing fabs for both 28 and 6555 production. In addition, Shenzhen's fab is targeted to have around 30000 8 inches wafer per month installed by the end of this year.
Our Shanghai 12 inches fab is planned to expand to 20,000 per month by the end of this year. Our Beijing B1 fab is now planned to expand to 45,000 wafer per month by the end of this year, too. Our Beijing joint venture fab is now targeted to increase to 18,000 per month by the end of this year. Furthermore, we are happy to have announced recently that the China IP Fund has joined in investing into our Beijing joint venture. We're pleased to have an additional committed partner to shoulder the investment responsibility of building an advanced fabs.
In terms of inorganic growth, we continue to see horizontal merger and acquisition undertakings. We are actively pursuing M and A targets that can provide additional capacity for our existing customers and for providing opportunity to penetrate new markets and win new customers. In terms of vertical partnership, given the current industry trend and our customers' request, there's a need for closer partnership between front end and back end IC manufacturing. Last month, we made strategic investment into JSAAT, which will draw us closer together to better serve our customers' need. Overall, SMIC is strategically building competitiveness globally and further optimizing our position as the preferred foundry provider in Mainland China.
The 28 revenue in Q1 2016 grew 33% quarter over quarter. As we gradually ramp up 28, our 28 flexible 2,840 capacity facility optimization in balancing customer demand with capturing new market. Demand from our customers for 28 nanometer is strong with a number of new engagements and demand for 40 nanometer is much stronger. Revenue from 40 nano grew 0.52% year over year and 24% quarter over quarter. In terms of differentiated technology, demand remains robust.
Sensor related revenue grew 180% year over year compared to Q1 2015 and 3% quarter over quarter in Q1 2016. Current demand is high, and we work to as we work to increase capacity to meet our customers' need. We continue to expand our differentiated portfolio to address the future opportunity, including new mobile application, IoT and automotive. In conclusion, we are embarking on a new phase of exciting growth for SMIC. We are witnessing customers eager to secure capacity across every node with SMIC.
Customers are still working on new designs in both our 8 inches and 12 inches fabs. We expect continued growth in the Q2, but remain constrained by the pace of our capacity growth. SMIC is optimistic in the long term given our strategy, strong customer partnership and execution track record. And we stay committed to maintaining sustainable profitability and building value for all stakeholders. Thank you for participating and for your support and for your time.
I will hand over the call to Yonggang for the financial highlights and 2016 Q2 guidance.
Okay. Thank you, Difei. Greetings to our listeners. I will highlight our last quarter results first and then give our Q2 2016 guidance. Last quarter revenue was record high again $634,300,000 in 1Q 2016, an increase of 4% quarter over quarter, exceeding our guided 1% to 3% increase.
Gross margin was 24.2%. Profit for the period attributable to SMRC was 61,400,000 dollars in 1 quarter 2016 compared to $38,600,000 in 4Q 2015 $55,500,000 in 1Q 'fifteen. Capacity utilization remaining high 99% in 1Q 2016. Now look ahead into the Q2 of 2016. Our revenue is expected to increase by 3% to 7% quarter over quarter.
Gross margin is expected to range from 25% to 27%. Non GAAP operating expenses are expected to range from $115,000,000 to $120,000,000 Our planned 2016 capital expenditures for foundry operations are up from $2,900,000,000 to 2,500,000,000 dollars Our blended 26 capital expenditures for non foundry operations are 50 $1,000,000 I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gaozong, and thank you, everyone, for joining us today. I will now comment on the details of our last quarter quarterly financials. On the income statement, revenue increased to 634,300,000 dollars above the guided range mainly because of increase of customer mainly because of increase of wafer shipments. Cost of sales increased to $480,600,000 mainly due to an increase of wafer shipments and increased manufacturing costs from our majority owned fab in Beijing. Gross margin was 24.2%.
The decline was mainly because increased manufacturing costs from our majority owned fab in Beijing which entered into mass production in December 2015 and the impact of a temporary power supply suspension occurred at our fabs in Beijing in February 2016. Operating expenses were $87,600,000 a decrease of 33.8 percent q onq from $132,300,000 in the previous quarter. R and D expenses decreased by $12,600,000 Q on Q to $53,500,000 The change was mainly due to lower number of lower amount of R and D activities. Funding of R and D contracts from the government was $8,000,000 in Q1 2016. General and administrative expenses decreased to $27,500,000 mainly due to a decrease of accrued employee bonus and our majority owned fab in Beijing entered into mass production in December 2015.
And as a result, the pre operating related expenses largely decreased in Q1 2016 compared to 4Q 2015. Other operating income decreased to $3,100,000 mainly because of lower gain realized from disposal of living quarters. Excluding the effect of employee bonus accrual, government funding and gain from the disposal of living quarters, non GAAP operating expenses were RMB92,200,000. Profit from operations was $66,100,000 compared to $41,600,000 in the previous quarter. Other expense was $13,600,000 the income tax expense decreased to $700,000 mainly due to a decrease of deferred tax expense.
Non controlling interest were $9,700,000 of credit to SMIC's attributable profit compared to $8,500,000 in the previous quarter. Moving to the balance sheet, at the end of the Q1 of 2016, cash and cash equivalents increased by $30,000,000 to $1,100,000,000 If including other financial assets, we have approximately $1,140,000,000 cash on hand at the end of Q1 2016. Our long term borrowing increased to $655,000,000 and short term borrowing increased to 126,000,000 dollars Overall, our financial leverage is still at a relatively low level. At the end of Q1 2016, our gross debt to equity ratio was 39.3%. Our net debt to equity ratio was 12.4%.
In terms of cash flow, we generated $126,000,000 of cash from operating activities. We target to generate approximately $900,000,000 of cash from operating activities this year. Cash used in investing activities increased to
$416,000,000
dollars Cash from financing activities was $323,000,000 To examine our revenue by application, the Communication and Consumer segments contributed 51.8% and 35.4% of our revenue respectively. Geographically, revenue from China, North America and EuroAsia contributed 47.2%, 29.4% and 23.4% of total revenue respectively. In terms of technology, revenue from 20 nanometers contributed 3.4%. Revenue from 4045 nanometers contributed 19.7%. Revenue from 50 fivesixty 5 nanometers and 90 nanometers contributed 21.6% and 3.3% respectively.
Meanwhile, 4.1% Micron and above contributed 55% of total revenue. In terms of our overall capacity, total monthly capacity at the end of the Q1 increased to 303,000 8 inches equivalent wafers per month, increase of 20% year on year. The change was mainly because the capacity expansion of our Beijing majority owned 12 inches fab, Shenzhen 8 inches fab and our Shanghai 12 inches fab. The planned 2016 capital expenditure for foundry operations are up from approximately RMB2.1 billion to approximately RMB2.5 billion, which are mainly for the expansion of capacity in our majority owned 12 inches fab in Beijing, our 8 inches fab in Shenzhen, 12 inches fab in Shanghai and the majority owned 12 inches joint venture fab for bumping services in Chang'e. A new majority owned joint venture fab and a new majority owned joint venture company which will focus on the research and development on 14 Nyno Logic Technology and also CapEx for research development tools, smart shops and intellectual property.
The planned 2016 capital expenditure for nonfungi operations of approximately $50,000,000 mainly for the construction of living quarters. I will now turn the call back to Anning for the Q and A session.
Thank you, Garrett. I would now like to open up the call for Q and A. As usual, please be reminded and please be reminded to limit your question to 2 per person. Operator, please assist.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Okay. Yes, thank you. Good morning. I wanted to ask a first question for the gross margin. You're guiding improvement in the 2nd quarter.
I think your original sense was it might stay low to mid-20s just factoring the higher CapEx and depreciation. So could you talk about the driver for the improvement? And then looking into second half, if we factor or if you could give us an indication where depreciation is moving and what the right expectation for margin as some of that depreciation comes on?
I think in the last earnings call, we were saying for the whole year, we're looking at mid to low 20s. I think based on the customer demand situation that we have seen in Q1 and our forecast of still very strong demand for the rest of this year, which means that we're going to maintain a very fairly high utilization. I think we are right now targeting a gross margin for the whole year to be about 25%.
Okay. And can you comment on depreciation now with the higher CapEx and how that may come on or how to model it through the year for the increase?
Yes, We are still looking at our depreciation to be about $780,000,000 for the whole year, which is about 50% increase from last year. In terms of the I think the next question is how would that profile for the rest of the year? I think the increase will be more back end loaded.
Okay. And then if I could then ask for the OpEx, the normalized OpEx, the G and A was down substantially from $67,000,000 to $27,000,000 I guess wanted to understand how much was the Beijing fab impact to understand the normalized G and A spending or maybe target? And then for R and D, it also it looks like it came down from lower spending normalized R and D. Just if we exclude bonus, how both of these lines should look and how you target to grow OpEx to fund some of the developments?
Yes. We are looking at a first of all, overall, we're looking at a normalized OpEx for this year, about 15% to 17%. And then when you talk about the G and A, I think it should be around 5% on a normalized basis.
Okay. And then sales and marketing constant. So R and D, it looks like only a 1 quarter impact where it came down just due to timing of R and D. So that will be most of the balance.
That's right. I think we are still looking at an increased spending R and D this year, which I think is very important for us as we're investing in our future technologies.
Okay. All right. Thank you.
Your next question comes from the line of Leiping Hua from Nomura. Please ask your question.
Thank you for taking my question. My first question is that in the call, you mentioned that you are confident to maintain around 20% revenue growth year over year next 3 to 4 years. So it seems you are quite confident to maintain the profitability due to this strong growth phase. Can you elaborate more? So where is the company's company?
Okay. We are getting the long term forecast from some of the major customers that is increasing their demand. And several of our customers, they are forecasting a very, very strong growth and also from their published growth results, we think that these forecasts are quite conservative, and we believe that a number of our customers will be growing strongly over the next 3 to 4 years. And this is the basis of our confidence where SMIC will be growing with these very successful customers.
I want to add to what TY said. I think the key to maintaining growth with profitability is the capital efficiency. As mentioned in TY, historically, at least in the last 3, 4 years, we've been maintaining a ratio there with $3 investment, we can generate $1 revenue on an annual basis, and we intend to maintain this momentum. So and I think also have to caution that I think this is what we call a long term forecast. It's based on our discussion with the customers, and we will only invest those capacity based on the real customer demand from our customers.
Thank you. So the second question for me is that the now you become the you have become the largest shareholder of the Jiaxinjiang Jiaxin, JCET. So what's your plan to in the JCETL? What's the synergy to your current foundry business? Or do you plan, for example, to send some people to turn around the spreadsheet?
Because in my knowledge, they are still in loss making status.
Okay. This investment is strategic. It's driven by a lot of our customer requests that would like a complete solutions, front end and back end integrated in China. And so we are looking at this collaboration in the long term. This does not exclude SMIC's collaboration with other back end companies.
So indeed, we will work closely with JCET in optimizing their overall efficiency. But at this moment, we do not have any plan to send any operational personnel to JSAV.
Thank you.
Your next question comes from the line of Rick Su from Daiwa Securities. Please ask your question.
Yes. Hi. Excuse me. Good morning. Congratulations to your strong result for Q1.
Okay. Basically, I've got 2 questions here. The first one is about your Q1 OpEx. I still a little bit confused because remember you guide about 1 above slightly above 120,000,000 dollars for your OpEx in Q1 and it turned out to be only $91,000,000 And can you walk for me walk with me what's the difference?
Yes. I think we I mentioned here that the mainly the reduction in the OpEx is for because of the lower bonus provisions and also in terms of the lower pre operating expenses because we have our 12 inches front Beijing move move into full production. Also because I think we're also able to manage a tighter cost control in the Q1. So I think that is the main reason for that.
Okay. Thank you. And could you remind me the common funding for RMB in Q1? How much?
US8 million.
US8 million dollars
US8 million
dollars I see. Thank you. Okay. The second question is, can you elaborate a little bit about your 28,000,000 ramp up schedule? Because the last time you I think as Doctor.
Qiu talked about the internal revenue ramp up is going to hit double digit by the end of this year. Is that still on track? Or given your increase of your CapEx, can I read that through as maybe your 28 nanometer is going to have some breakthrough and the ramp was the ramp up above your original expectations?
Okay. Let me say, we have a continued increase in the 28 output. But at this moment, we are going through a customer's product transition. And so the volume product coming in will be ramping up in Q3 and Q4. So therefore, we expect that the 28% revenue will slightly be reduced to from above 10% to maybe around 5% to 8% due to this new product introduction.
In addition, a lot of our new capacity has been really being put on to the production of 40 nano because of extremely high 40 nano demand.
Okay. So in this case by the way, just a little bit clarification. So you're talking about 5% to 8% of the revenue contribution from 28% by the end of this year, right?
Right. 5% to 8%. Yes.
All right. So can I fairly assume, actually, the majority of the CapEx increase for this year is going to take care of the strong demand for 14 nanometer rather than 28? Am I correct?
That will be yes, it will be actually taking care of the both the 40 nano as well as preparing for the 28 nano ramp next year.
Understood. All right. Just one quick follow-up. Yes.
Sure. 1228 nanos.
Okay. Yes, just one quick follow-up. What's the mean demand application for 40 nanometer throughout the whole year?
Right now, the majority is still polycyon, but we expect to we are targeting to have some small shipments started for Hi Kate next quarter.
Sorry. I was talking about the main demand application for 40 now.
Sorry, sorry, sorry. Okay. The main demand for 40 are for WiFi, digital TV, RF, set of box and some of the access points like PON, etcetera.
Okay. Got you. Well, thank you so much.
Your next question comes from the line of Bill Lu from UBS. Please ask your question.
Yes, hi. Good morning. Going back to the T. Y. Comments on the 20% growth for the next several years, I'm hoping you could provide a little bit more color on that as far as whether that growth comes from China or non Chinese customers?
What are some of the key applications that will drive that 8 inches versus 12 inches etcetera?
Okay. We are seeing this very strong customer demand across all nodes, so and also across all regions. Therefore, certainly, China will continue to grow very fast. But this year, we are also seeing new customers ramping from Europe. And next year, we'll be seeing additional customers ramping customer from Japan ramping.
So we are very excited that our customers are now coming in from all over the world across all of the technology nodes.
I guess I'm just trying to understand because that outlook is certainly better than seeing better growth and so you're doing something strategically. Is it customers wanting to do more production in China? What exactly is driving that bullish forecast?
I think we have noticed that we have particularly good customer set that are gaining market share even in the smartphone area. So despite the fact that smartphone growth is slowing down, we think that there is still substantial room for our customer base to grow. And of course, we are also seeing application in other areas such as TV, such as access point and consumer.
Yes. Bill, I think as you can I'm sure you know that actually the China IC market growth has been outpacing the rest of the world. And given our China positioning, I think we also expected that we are also expecting that we're going to outgrow the industry.
Okay. Secondly, so that 20% guidance is very helpful. Is there any way you can give us a gross margin outlook for the next 3, 4 years as well?
Bill, I think this is
a very good question. But I think at this point in time, actually, we mentioned about this, this is really a long term target that we are shooting for. And I think it's a bit premature for us to come in on the gross margin. But enough to say that maintaining sustainable profitability is our overriding objective.
So I guess the baseline is the margin we're looking at today, we shouldn't expect it to go down significantly. I think maybe going up is more of a question for a lot of different things, but this is a decent baseline?
Yes. We always try our best to maintain a good margin.
Okay, great. Thank you very much.
Your next question comes from the line of Stephen Pelayo from HSBC. Please ask your question.
Yes. First, just a quick follow-up to Bill's there. So I'm just trying to understand what the target model for SMIC, margin model for SMIC, is it a mid 20s with a gross margin with a mid to upper teens OpEx ratio, so we're doing kind of high single digit op margin? Or do you see a scenario when you're growing revenues 20% per year, but we start talking about back to 30% and above gross margins and dropping through mid teens to the operating margin line. Help us understand that a little bit better.
I think assuming we can grow to 20% per annum, I think we would still target at least a mid-twenty margins. But at the same time, we should see a good increase good decrease in our OpEx because the much bigger scale operations. So that should be helpful for our overall profitability.
Okay. I understand. And then just two quick accounting questions. R and D credits have been kind of running quarterly in this $8,000,000 to $10,000,000 per quarter run range run rate. I remember last quarter you talked about it, the amount increasing if you're a pretty I sizable amount.
I know it's difficult to call the timing on that, but could you give us an idea on what type of R and D credit targets you're thinking about for this year and when would it likely fall? What quarters it might increase significantly if it does? And then the last question is just relative to the other most kind of unpredictable line for us is this non controlling interest line. Do you have any thoughts on kind of a full year target for that as well?
Yes. I think last year, the R and D funding is about US44 million dollars And this year, we're looking at maybe about US60 million dollars to US65 million dollars
Thank you. And on the non controlling interest line, what do you think there for this year?
In Q1, it was about 8,200,000 dollars and I think this number may sorry, Q1 is about $9,700,000 So probably we are looking at a slight increase in the next 2, 3 quarters.
So even if that fab ramps in bigger volumes, it's still only a slight increase, you don't see a much more significant add back in the second half of the year?
Well, which means that we have to maintain a pretty good utilization of fab.
Okay.
All right, great. Thank you.
Steve, I think that's for the to answer that question that we have to try very hard to maintain the good utilization and cost control in our Beijing joint venture to so that the loss is minimized. And therefore, the add back will be minimized as well.
Your next question comes from the line of Suji D'Silva from Topeka. Please ask your question.
Hello. Nice job on the quarter. So the 20% growth target you put
out there, I'm wondering if
you could support that with organic capacity increases? Or would it require inorganic capacity increase to continue to grow at that clip?
So indeed, as I mentioned, we are always looking at a potential mergeracquisition target. And part of the difficulty in projecting the margins in the future is on the proportion of the new revenue coming out of the emerging acquisition and acquisition to that of the organic growth. And so we think that this the opportunity to do a merger and acquisition is actually quite good as time proceeds.
Understood. Look for the guidance as it's come in. And then on 28 nanometer, can you talk about the number of customers that are ramping today and how many you'd expect to ramp at the toward the exiting 2016, early 2017 timeframe?
Okay. There are about 4 customers ramping at this moment. So one major customer that is really coming in with fairly high volume. The other are still in the product risk production stage.
And it would be a similar amount number toward the end of the year in early 2017 or it would scale up?
We are seeing an increasing number of customers doing the new product tape outs.
Fair enough.
And then last question, bigger picture question. With all the consolidation going on in the semiconductor industry, are you seeing any impact or even opportunities from that? Or is it kind of not as impactful to you because a lot of the China demand is driving it?
Right now, yes, indeed, we're seeing some of our customers merging. These actually could bring in additional opportunities because they bring in exposures to potential new customers. So it's not all even when for the U. S. Where there are a lot of Virgin acquisition, actually, we see more opportunity rather than reduction in the order.
Thank you, Tiwa.
Your next question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question.
Yes, hi. Thanks for taking my question. My first question is on margins. I think back in February, you had indicated that this year the margins could be in the low to mid-20s because of the depreciation increase. Obviously, the margins look like shaping up better in Q2.
Could you talk a little bit about how we should think about the margins in second half of the year? Are we still going to be in that 25% to 27% range? And what has contributed to the margin expansion compared to your view about 3 months back?
Yes. I think Google, as I mentioned in my earlier response, we are targeting for the whole year to be mid-twenty percent gross margin. And the reason for this somewhat improved outlook is because of: 1, we are looking at very strong demand from customer, which means that we can maintain we believe that we can maintain a fairly high utilization for our fabs, both on new fabs and old fabs. And secondly, we're also exercising very tight cost control to make sure that our profitability will be least impacted by the ramp up.
Okay, okay. And just going back to this longer term growth target in the region of 20%. Are you baking in any M and A related stuff also into this? And second is, do we need to have a credible and sizable 14 nanometer offering in that 2 to 3 year context to get to your 20% growth targets?
SMIC is committed to advanced technology development. And so our present road map calls for 14 nano to be ready in 2018 to 2019 range. So for sure, that 14 nano technology will be an offering within the next 5 years. Now we do not think that the 20% growth is absolutely dependent on the status of the 14 nano technology. And so the with the present technology, we see opportunity that will generate this growth as well.
Of course, we also think that there will be opportunities in the Emergent acquisition, and this will contribute to the 20% growth.
Okay. Just last question, based on your formula of $3 investment bringing in a dollar of revenue each year, looks like the CapEx is going to be comfortably about $2,000,000,000 to get to this 20% for the next few years. So could you talk a little bit about the funding? How should we think about funding this CapEx? I think your net debt is already about 35%.
Are we thinking about equity financing at some point in the near term? Or are you still comfortable with debt financing?
Well, first of all, Pogo, just want to correct what you said. Our net gearing right now is only about below 20%.
Right. I'm sorry, total net, yes.
Yes. So okay, first of all, our preference always funds through our operations. This year, as I mentioned in the script,
we
are looking at cash from operation to be about CNY 900,000,000, which is about CNY 200,000,000 more than last year. And as we continue to grow the revenue, we believe our cash from operation will certainly increase, okay? That's point number 1. And secondly, right now, we believe that we have a pretty healthy balance sheet, and I think there would still be room for us to increase the leverage for us. So I think our preference is always to fund through debt.
And in the future, we will talk about 5 years. So we'll also be looking at different kind of financing to that would make sense for us.
Okay. Got it. Thank you.
Your next question comes from the line of Ken Hui from Jefferies. Please ask your question.
Thank you for taking my questions. My first question is regarding your recent reduction in your ownership in the Beijing JV. Will there be any impact on your P and L for this quarter due to the transactions such as disposal gain or loss? That's my first question. Thank you.
No, there would not be any. Yes, there won't be any impact on our P and L.
Okay. Thank you. My second question is regarding your 20% annual growth target for the next few years. My personal concern is actually about the fingerprint sensor, which is now a big part of your revenue. But I do see there is potentially some risks regarding the change of technology from chip based technology to, for example, camera or flexible print circuits.
Are you concerned about that? Or you're not worried about it at all?
I think the application for fingerprint certainly is expanding. We see that there are application in all sorts of security related products, not just in the mobile phone as well as in the perhaps in the credit card area. And so we think that there may be other technology that is applicable in the mobile, but there will be certain certainly other opportunities that come up with the fingerprint sensors. Okay.
Thank you.
Yes, I think
on to what T. Y. Said, I think the strength for SMIC is that we do not depend on 1 single customer or 1 single technology. We try to develop a very diversified business portfolio and that we've been quite successful in the past that we maintain the same strategy going forward.
Okay. Thank you very much. Thank you.
Your next question comes from the line of Sebastian Hou from CLSA. Please ask your question.
Hi, guys. Thanks for squeezing me in. So I have a couple of questions. The first one is the I'm looking at your blended wafer ASP because wafer shipment up by 6%, revenue up 4% in Q1. So that means your blended wafer ASP actually declined.
But if we look at your product mix by nodes, actually the 40 nanometer has increased a lot and overall 12 inches wafer as a percentage of the revenue increased compared the percentage increased compared to 8 inches So supposedly, the higher wafer price. So I just wondering, is there any other reason or factor that I missed or the huge product mix change or the pricing pressure?
What happened is that usually we will have some kind of a price negotiation with the customers at the beginning of each year. That may have some impact on the Q1 planned ASP, but we are looking at as our product mix more shifting towards the high end for the rest of the year, we think that the ASP should go should be stable or maybe increase slightly.
Okay. Let me add to that. There's another factor that comes in. We have a in the past, a significant portion of our customers that do turnkey, including the back end turnkey. The back end turnkey give us additional ASP per wafer.
Now due to the product mix change, we have actually, that customer has actually have more products in the non full turnkey wafers than the turnkey wafers in the recent quarters. And so that take out certain amount of ASP, but it really does not impact our profitability. I don't know whether because the turnkey the back end turnkey part is basically just almost a full transfer to pricing.
Okay. And my second question is on your 28 nanometers of truckers. So I think earlier you guys mentioned about the it seems like the demand on the 40 nanometer is stronger. So that means more of the capacity were allocated to the 14 nanometer supposedly. So based on my understanding, if I'm understanding correctly, the I think 40 nanometer and 20 nanometer, based on your switchable strategy, is I think more likely for the polycyon on 28 nanometer.
So does that mean that the at least for the most of the second half of this year, or even like in 2017, the majority of your 20 nanometers revenue contribution will be still be on the Polycyon, while the high committal gate will still be relatively much smaller?
We are starting to ramp high ks and we'll be starting to see some small amount of HiK revenue in the Q2. So indeed, our polycyon volume will be still ahead of our high case. So this will be the case for the second half of the year as well as the first half of next year.
Okay. Can I just add a follow-up on this one is that how is the EO rate performance on the polysilicon and high committal decay, if you can give some indication?
I think both technology are performing up to our expectation.
I would now like to hand the call back to CEO, Doctor. Qiu for closing remarks.
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. See you next time. Thank you.
This is the end of SMIC's 1st quarter earnings conference call. We thank you for joining us today.