Welcome to the Semiconductor Manufacturing International Corporation's first 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 Project 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. However, at the conclusion of the management presentation, we will be having a question and answer session, at which time you will receive further instructions as to how to participate. The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event at www.smics.com.
Without further ado, I would now like to introduce to you Mr. En-Ling Feng, Vice President of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's first 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 be followed by our Q&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.com under Investor Relations in the Events and Presentation 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 Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed as 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'll 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, 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 orders 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 first quarter of 2016 was another great quarter for SMIC, which surpassed the industry's average revenue growth and expanded more than 24% year-over-year and 4% quarter-over-quarter on a seasonally weaker quarter and exceeded our guidance of 1% to 3% quarter-over-quarter growth. Our flexible 28/40 capacity has enabled us to address our customers' production ramp
The 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 micron and above grew 29% year-over-year and 4.8% quarter-over-quarter. Overall utilization was 99% in the first quarter, including the newly ramping fabs. Apart from continued strength in our overall product mix, there was increased demand in consumer application in the first quarter from television and set-top box-related applications. Having successfully demonstrated a 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 three to four years.
In the meantime, our commitment to growth and 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 scale 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% 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 $2.1 billion upward to $2.5 billion. We will use every dollar wisely. Our past records 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 65, 55 production. In addition, Shenzhen's fab is targeted to have around 30,000 eight-inch wafer per month installed by the end of this year. Our Shanghai 12-inch 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 IC 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 seek horizontal merger and acquisition undertakings. We are actively pursuing M&A targets that can provide additional capacity for 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 IP manufacturing. Last month, we made a strategic investment into JCET, 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 flexible 28/40 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. Demand for 40 nano is much stronger. Revenue from 40 nano grew 52% year-over-year, 24% quarter-over-quarter. In terms of differentiated technology, demand remains robust. Sensor related revenue grew 180% year-over-year compared to Q1 2015, 3% quarter-over-quarter in Q1 2016. Current demand is high. As we work to increase capacity to meet our customers' needs, 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-inch and 12-inch fabs. We expect continued growth in the second quarter, 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. 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 highlight and the 2016 Q2 guidance.
Okay. Thank you, T.Y. Chiu. Greetings to all our listeners. I will highlight our last quarter results first, give our second quarter 2016 guidance. Last quarter, revenue was record high again, $634.3 million in 1Q16, an increase of 4% quarter-over-quarter, exceeding our guided 1%-3% increase. Gross margin was 24.2%. Profit for the period attributable to SMIC was $61.4 million in 1Q16, compared to $38.6 million in 4Q15, and $55.5 million in 1Q15. Capacity utilization remaining high, 99% in 1Q16. Now, looking ahead into the second quarter of 2016. Our revenue is expected to increase by 3%-7% quarter-over-quarter. Gross margin is expected to range from 25%-27%. Non-GAAP operating expenses are expected to range from $115 million-$120 million. Our planned 2016 capital expenditures for foundry operations are up from $2.1 billion-$2.5 billion.
Our planned 2016 capital expenditures for non-foundry operations are $50 million. I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gao. Thank you everyone for joining us today. I will now comment on the details of our last quarterly financials. On the income statement, revenue increased to $634.3 million, above the guided range, mainly because of increase of wafer shipments. Cost of sales increased to $480.6 million, 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 occur at our fabs in Beijing in February 2016. Operating expenses were $87.6 million, a decrease of 33.8% QOQ from $132.3 million in the previous quarter. R&D expenses decreased by $12.6 million QOQ to $53.5 million. The change was mainly due to lower amount of R&D activities.
Funding of R&D contracts from the government was $8 million in Q1 2016. General administrative expenses decreased to $27.5 million, mainly due to a decrease of accrued employee bonus and our majority-owned fab in Beijing entered into mass production in December 2015. As a result, the pre-operating related expenses largely decreased in Q1 2016 compared to 4Q 2015. Other operating income decreased to $3.1 million, 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 $92.2 million. Profit from operation was $66.1 million, compared to $41.6 million in the previous quarter. Other expense was $13.6 million. The income tax expense decreased to $0.7 million, mainly due to a decrease of deferred tax expense.
Non-controlling interests were $9.7 million of credit to SMIC's attributable profit, compared to $8.5 million in the previous quarter. Moving to the balance sheet. At the end of the first quarter of 2016, cash and cash equivalents increased by $30 million to $1.1 billion. If including other financial assets, we have approximately $1.14 billion cash on hand at the end of Q1 2016. Our long-term borrowing increased to $655 million, and short-term borrowing increased to $126 million. Overall, our financial leverage is still at a relatively low level. At the end of Q1 2016, our growth debt to equity ratio was 39.3%. Our net debt to equity ratio was 12.4%. In terms of cash flow, we generated $126 million of cash from operating activities. We targeted to generate approximately $900 million of cash from operating activities this year. Cash used in investing activities increased to $416 million.
Cash from financing activities was $323 million. 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 Eurasia contributed 47.2%, 29.4%, and 23.4% of total revenue respectively. In terms of technology, revenue from 28 nanometers contributed 0.4%. Revenue from 40/45 nanometers contributed 19.7%. Revenue from 55/65 nanometers and 90 nanometers contributed 21.6% and 3.3% respectively. Meanwhile, for 0.13 micron and above contributed 55% of total revenue. In terms of our overall capacity, total monthly capacity at the end of the first quarter increased to 303,000 8-inch equivalent wafers per month, increase of 20% year-on-year. The change was mainly because the capacity expansion of our Beijing majority-owned 12-inch fab, Shenzhen 8-inch fab, and our Shanghai 12-inch fab.
The planned 2016 capital expenditure for foundry operations are up from approximately $2.1 billion-$2.5 billion, which are mainly for the expansion of capacity in our majority-owned 12-inch fab in Beijing, our 8-inch fab in Shenzhen, 12-inch fab in Shanghai, and the majority-owned 12-inch joint venture fab for bumping services in Jiangyin. A new majority-owned joint venture company, which will focus on the research and development on 14 nanometer logic technology, and also CapEx for research development tools, smart shops, and intellectual property. The planned 2016 capital expenditure for non-foundry operations are approximately $50 million , mainly for the construction of living quarters. 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 question 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 or hash key. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Okay. Yeah, thank you. Good morning. I wanted to ask a first question for the gross margin. You're guiding improvement in the second quarter. I think your original sense was it might stay low to mid-20s, just factoring the higher CapEx and depreciation. Could you talk about the driver for the improvement? Looking into second half, 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 our 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 are seeing 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 fairly high utilization. I think we are right now targeting a gross margin for the whole year to be about 25%.
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 million for the whole year, which is about 50% increase from last year. I think your next question is how would that profile for the rest of the year? I think the increase will be more back-end loaded.
Okay. If I could then ask for the normalized OpEx. The G&A was down substantially from $67 million to $27 million. I just wanted to understand how much was the Beijing fab impact, to understand the normalized G&A spending or maybe target. For R&D, it looks like it came down from lower spending, normalized R&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?
Yeah. First of all, overall, we're looking at a normalized OpEx for this year, about 15%-17%. When you talk about the G&A, I think it should be around 5% on a normalized basis.
Okay. Sales and marketing constant. R&D, it looks like only a one-quarter impact where it came down just due to timing of R&D. That'll be most of the balance.
That's right. I think we are still looking at an increased spending R&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 Leping Huang from Nomura. Please ask your question.
Thank you. 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 yearly in next three to four year. It seems you are quite confident to maintain the profitability due to this strong growth space. Can you elaborate more? Where is the confidence coming from? Yeah.
Okay. We are getting the long-term forecast from some of the major customers that is increasing their demand. Several of our customers, they are forecasting a very strong growth and also a diversification into their market area. From their track record and 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 three to four years. 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 three, four years, we've been maintaining a ratio that with $3 investment, we can generate $1 revenue on annual basis. We intend to maintain this momentum. I think we also have to caution that I think this is what you call a long-term forecast. It's based on our discussion with the customers, we will only invest those capacity based on the real customer demand from our customers.
Thank you. The second question from me is that now you have become the largest shareholder of the Jiangyin Changjiang, the JCET. What's your plan in the JCET or what's the synergy to your current foundry business? Do you plan, for example, to send some people to turn around the [inaudible]? Because in my knowledge, they are still in loss-making status. Thank you.
Okay. This investment is strategic. It's driven by a lot of our customer requests that would like a complete solution, front end and back end integrated, in China. We are looking at this collaboration in the long term. This does not exclude SMIC's collaboration with other back end companies. Indeed, we will work closely with JCET in optimizing their overall efficiency. At this moment, we do not have any plan to send any operational personnel to JCET.
Thank you.
Your next question comes from the line of Rick Hsu from Daiwa Securities. Please ask your question.
Yeah. Hi. Excuse me. Good morning. Congratulations to your strong result for Q1. Okay. Basically, I got two questions here. The first one's about your Q1 OpEx. I'm still a little bit confused because remember, you guide slightly above $120 million for your OpEx in Q1, and it turned out to be only $91 million. Can you walk with me what's the difference?
Yeah, I think I mentioned here that mainly the reduction in the OpEx is because of the lower bonus provisions and also in terms of the lower pre-operating expenses, because we have our 12-inch fab in Beijing move into full production. Also because I think we also able to manage a tighter cost control in the Q1. I think that is the main reason for that.
Okay. Thank you. Could you remind me the number? Because I think probably I missed the number. What's the government funding for R&D in Q1? How much is it?
$8 million.
$8 million.
$8 million.
I see. Thank you. Okay, the second question is, can you elaborate a little bit about your 28 nanometer ramp-up schedule? Last time, I think Dr. Chiu talking about the internal revenue ramp-up is going to hit double digits by the end of this year. Is that still on track? Given your increase of your CapEx, can I read that through as a maybe your 28 nanometer is going to have some breakthrough and with a 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. The volume product coming in will be ramping up in Q3 and Q4. Therefore, we expect that the 28 revenue will slightly be reduced from above 10% to maybe around 5%-8% due to this new product introduction. In addition, a lot of our new capacity has been really being put onto the production of 40 nanometer because of extremely high 40 nanometer demand.
Okay, in this case. Oh, by the way, just a little bit clarification. You're talking about 5%-8% of the revenue contribution from 28 by the end of this year, right?
Right. 5%-8%. Yeah.
All right. Can I fairly assume actually the majority of the CapEx increase for this year is going to take care of the strong demand for 40 nanometer rather than 28? Am I correct?
Yes. It will be actually taking care of the Both 40 nano as well as preparing for the 28 nano ramp next year.
Understood. All right, just one quick follow-up.
Yes.
Sure. Thank you.
For the 28 nano ramp.
Okay. Yeah, just one quick follow-up. What's the main demand application for 40 nanometer throughout the whole year?
Right now, the majority is still poly-Si, but we are targeting to have some small shipments started for high-K next quarter.
Sorry, I was talking about the main demand application for 40 nanometer.
Oh, sorry. Okay. The main demand for 40 are for Wi-Fi, digital TV, RF, set-top box, and some of the access points like PON, et cetera.
Okay, got you. Well thank you so much.
Your next question comes from the line of Bill Lu from UBS. Please ask your question.
Yeah. Hi, good morning. Going back to the TY 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-inch versus 12-inch, et cetera?
Okay. We are seeing this very strong customer demand across all nodes and also across all regions. Certainly China will continue to grow very fast. This year we are also seeing new customers ramping from Europe and next year we'll be seeing additional customers from Japan ramping. We are very excited that our customers are now coming in from all over the world across all the technology nodes.
I guess I just want to understand because that outlook is certainly better than seeing better growth. You're doing something right 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 a particularly good customer set that are gaining market share even in the smartphone area. Despite the fact that smartphone growth is slowing down, we think that there is still substantial room for our customer base to grow. Of course, we are also seeing application in other areas such as TV, such as access point, and consumer.
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. Given our China positioning, I think we are also expecting that we're going to outgrow the industry.
Okay. Secondly, that 20% guidance is very helpful. Is there any way you can give us a gross margin outlook for the next three to four years as well?
Bill, I think this is a very good question. I think at this point in time, actually we mentioned about this is a real long-term target that we are shooting for. I think it's a bit premature for us to comment on the gross margin. Enough to say that maintaining sustainable profitability is our overriding objective.
I guess the baseline is the margin we're looking at today. We shouldn't expect it to go down significantly. Maybe going up is more of a question for a lot of different things, this is a decent baseline?
Yeah, we always try our best to maintain a good margin.
Okay, great. Thank you very much.
Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
Yeah, first, just a quick follow-up to Bill there. I'm just trying to understand the target model for SMIC margin model for SMIC. Is it a mid-twenties with a gross margin with a mid to upper teens OpEx ratio, we're doing kind of high-single-digit op margin? Or do you see a scenario when you're growing revenues 20% per year where we start talking about back to 30% and above gross margins and dropping through mid-teens through the operating margin line? Help us understand that a little bit better.
Assuming we can grow to 20% per annum, I think we would still target at least a mid 20 margins. At the same time, we should see a good decrease in the OpEx because of the much bigger scale operations. That should be helpful for our overall profitability.
Okay, I understand. Just two quick accounting questions. R&D credit's been kind of running quarterly in this $8 million to $10 million per quarter run rate. I remember last quarter you talked about it, the amount increasing this year, I think you said a pretty sizable amount. I know it's difficult to call the timing on that, could you give us an idea on what type of R&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? 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?
I think last year, the R&D funding is about $44 million. This year we're looking at maybe about $60 million to $65 million.
Thank you. On the non-controlling interest line, what do you think there for this year?
In Q1, it was about $8.2 million. Sorry, Q1 is about $9.7 million. Probably we are looking at a slight increase in the next two, three quarters.
Even as 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, no, we have to maintain a pretty good utilization of fab.
Okay. All right, great. Thank you.
Steve, I think that to answer that question, we will have to try very hard to maintain the good utilization and cost control in our Beijing joint venture, so that the loss is minimized, and therefore, the add back will be minimized as well.
I certainly understand that, [inaudible] Thank you very much.
Your next question comes from the line of Suji Desilva from Topeka. Please ask your question.
Hello. Nice job on the quarter. 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 increases to continue to grow at that clip?
Indeed, as I mentioned, we are always looking at a potential merger acquisition target. Part of the difficulty in projecting the margins in the future is on the portion of the new revenue coming out of the merger and acquisition to that of the organic growth. We think that the opportunity to do a merger and acquisition is actually quite good as time proceeds.
Understood. We'll look for the guidance as it's come in. On 28 nanometer, can you talk about the number of customers that are ramping today, and how many you'd expect to ramp toward the exiting 2016, early 2017 timeframe?
Okay. There are about four customers ramping at this moment. One major customer that is really coming in with fairly high volume. The other are still in the product risk production stage.
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 out.
Fair enough. Last question, a 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 are seeing some of our customers merging. These actually could bring in additional opportunities, because they bring in exposures to potential new customers. It's not all, even when for the U.S. where there are a lot of Merger and acquisition. Actually, we see more opportunity rather than reduction in the order.
Thank you, T.Y.
Your next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Yeah. 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%-27% range? What has contributed to the margin expansion, compared to your view about three months back?
Yeah, I think, Gokul, as I mentioned in my earlier response, we are targeting for the whole year to be mid-20s gross margin. The reason for this somewhat improved outlook is because of, one, we are looking at very strong demand from customer, which means that we believe that we can maintain a fairly high utilization for our fabs, both on new fabs and old fabs. Secondly, we also exercising very tight cost control to make sure that our profitability will be less impacted by the ramp-up.
Okay. Just going back to this longer-term growth target in the region of 20%, are you baking in any M&A-related stuff also into this? Second is, do we need to have a credible and sizable 14 nanometer offering in that two to three-year context to get to your 20% growth targets?
SMIC is committed to advanced technology development. Our present roadmap calls for 14 nano to be ready in 2018 to 2019 range. For sure that 14 nano technology will be an offering within the next five years. We do not think that the 20% growth is absolutely dependent on the status of the 14 nano technology. 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 merger and 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 above $2 billion to get to this 20% for the next few years. 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 you're still comfortable with debt financing?
Well, first of all, Gokul, just want to correct what you said. Our net gearing right now is only about below 20%.
Right. Sorry. Total debt. Yep.
Okay, first of all, our preference always fund through our operations. This year, as I mentioned in the script, we are looking at cash from operation to be about $900 million , which is about $200 million more than last year. as we continue-
Okay
to grow the revenue, we believe our cash from operation will certainly increase. Okay? That is point number 1. 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. I think our preference is always to fund through debt. in the future, we talk about five years. we'll also be looking at different kind of financing that would make sense for us. Yeah.
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 question. My first question is regarding your recent reduction in your ownership in the Beijing JV. Will there be any impact on your P&L for this quarter, due to the transaction, 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&L.
Okay, thank you. My second question is regarding your 20% annual growth target for the next few year. My personal concern is actually about the fingerprint sensor, which is now a big part of your revenue. 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 are 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 perhaps in the credit card area. We think that there may be other technology that is applicable in the mobile, but there will be certainly other opportunities that come up with the fingerprint sensors.
Okay. Thank you.
Yeah, I think to add on to what T.Y. said, I think the strength for SMIC is that we do not depend on one single customers or one single technology. We try to develop a very diversified business portfolio. That, we've been quite successful in the past, and we maintain the same strategy going forward.
Okay. Thank you very much. Thank you.
Your next question comes from the line of Sebastian Ho from CLSA. Please ask your question.
Hi, guys. Thanks for squeezing me in. I have a couple questions. The first one is the I'm looking at your blended wafer ASP, because wafer shipment up by 6%, revenue up 4% first quarter, that mean your blended wafer ASP actually declined. If we look at your product mix by nodes, actually the 40 nanometers increased a lot, and overall 12-inch wafer as a percentage of the revenue increased compared to 8-inch. Supposedly, the higher wafer price. 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 blended ASP. 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 be stable or maybe increase slightly.
Okay. Let me add to that. There's another factor that comes in. We have, 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, actually that customer has actually have more products in the non-full turnkey wafers than the turnkey wafers in the recent quarters. That take out certain amount of ASP, but it really does not impact our profitability. Because the back-end turnkey part is basically just almost a full transfer to pricing.
Okay. Thank you. My second question is on your 28 nanometers progress. I think earlier you guys mentioned about the, it seems like the demand on the 40 nanometers is stronger. That means more of the capacity were allocated to the 40 nanometers supposedly. Based on my understanding, if I understand it correctly, the I think 40 nanometers and 28 nanometers, based on your switchable strategy, is I think more likely for the poly-silicon 28 nanometers. Does that mean that at least for the most of the second half of this year or even like in 2017, the majority of your 28 nanometer revenue contribution will still be on the poly-silicon, while the High-K metal gate will still be relatively much smaller?
We are starting to ramp High-K, we'll be starting to see some small amount of High-K revenue in the second quarter. Indeed, our poly-silicon volume will be still ahead of our High-K. This will be the case for the second half of the year as well as the first half of next year.
Okay. Thank you. Can I just add a follow-up on this one? Is that how is the yield rate performance on the poly-silicon High-K metal gate? If you can give some indication.
I think that both technology are performing up to our expectation.
Okay. Thank you, guys. A good quarter.
Thank you.
I would now like to hand the call back to CEO, Dr. Chiu , 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 first quarter earnings conference call. We thank you for joining us today.