Welcome to the Semiconductor Manufacturing International Corporation's fourth quarter 2015 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-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 a listen-only mode. However, at the conclusion of the management presentation, we will be having a question and answer session, at which time you'll receive further instructions as to how to participate. The earnings press release is available for 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 like to introduce you to Mr. En-Lin Feng, Vice President of Investor Relations, for a cautionary statement.
Good morning and good evening. Welcome to SMIC's fourth quarter 2015 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. Then 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 www.smics.com 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 more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed with the U.S. Securities and Exchange Commission on April 28th, 2015. 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-Lin. Greetings to everyone. Happy Lunar New Year, and thank you all for joining us for this quarter's call. Today, I'm pleased to report on SMIC's outstanding fourth quarter and 2015 full year achievements. We will also share with you our outlook for 2016 and other business updates. SMIC has achieved another quarter of record high revenue in Q4 with the expectation of another growth quarter in Q1. SMIC's utilization remains high as we continue to expand our capabilities to meet strong customer demand. In the fourth quarter of 2015, we achieved record high revenue of $610 million, a growth of 25.6% year-over-year and 7.1% quarter-over-quarter, surpassing our original expectations and guidance and outperforming typical seasonality.
This outstanding growth was paired with a six percentage point increase in gross margin in Q4 2015 compared to Q4 2014, and an operating profit of $41.6 million in Q4 2015 compared to $1.6 million in Q4 2014. Overall, 2015 was a stellar year for SMIC. We demonstrated resilience in the face of industry slowdown. On an annual basis, our revenue hit a record high of $2.24 billion, a growth of 13.5% compared to 2014. When measured in RMB, 2015 growth reached 20%. In 2015, we also achieved historical highs on all measures of profitability, including gross margins, operating profit, and net profit. Despite the inventory correction in the industry during the year, we maintained full utilization throughout 2015. We attribute this performance to the careful execution of our strategy.
In 2015, we matured new customers, introduced new technologies, and grew with existing but growing applications, including various sensor-related technology, embedded memory, networking, Bluetooth, and others. We also began to manufacture 28 nano technology and introduce SMIC's new ultra-low leakage SPOCLe technology . With a great year behind us, we are well-positioned to have a strong 2016. Following our acceleration of R&D investments in the past few years and in response to strong customer demand, we target an annual revenue growth of 20%, which is significantly higher than the foundry industry growth. Consistently, we're adding significant new capacities. Our target 2016 year-end installed capacity is 341,000 eight-inch equivalent wafers per month, an increase of 20% over 2015 year-end capacity. Our full year 2016 CapEx is projected to be US $2.1 billion. As a result, our annual depreciation and amortization is expected to increase by approximately $260 million-$280 million.
Due to the fact that we are simultaneously ramping up two new fabs in 2016, we target the average annual gross margin in 2016 is expected to decline to low -to-mid-20s. However, we target to maintain a healthy EBITDA margin of approximately 35% in 2016. This is similar to 2015. As announced previously, on February 1st, Beijing Fab experienced a temporary power supply suspension. On February 3rd, power supply resumed, and on the 4th, shipment resumed. We estimate that the impact to most customers related to this incident was limited. I'm pleased with our team's speedy response to the incident, controlling the situation and communicating with customers. Despite the incident, we are still targeting quarterly growth in Q1, contrary to typical Q1 seasonality in the industry. We continue to grow and target new markets using existing and newly developed technology.
We remain determined to capture the growth opportunities stemming from our customers' strong demand and China's growing semiconductor industry. We will work diligently to better capture these opportunities in the coming years. Our strategy to grow our company in a profitable manner is basically threefold: To maintain high utilizations, differentiate and diversify our product mix, and expedite our advanced technology to serve our customers. Profitability is our priority and primary underlying objective. The 28 revenue in Q4 2015 grew threefold compared to Q3 2015. In addition, we are pleased to have announced earlier this week that our customer, Leadcore, High-K Metal Gate product is system validated and ready for commercialization. We target to reach double-digit revenue contribution from 28 nanometer in Q4 2016. We believe that 28 nanometer will be a long-lived node and is strategic for the long-term growth of SMIC.
Meanwhile, the demand for our 40 nano has remained strong. Revenue from 40 nano grew 15.2% quarter-over-quarter and 92.7% year-over-year. Our flexible 28 and 40 capacity has enabled us to best utilize our capacity and address our customers' needs. In terms of differentiated technologies on mature lines, demand remains robust. Revenue from 0.11 micron to 0.13. Revenue from 0.11 to 0.35 grew 17.3% year-over-year in Q4 2015 compared to Q4 2014. Sensor-related revenue grew more than 35% quarter-over-quarter in Q4 2015, and 150% year-over-year compared to Q4 2014. Meanwhile, we continue to expand our differentiated portfolio, and I'm pleased to report our ultra-low power SPOC technology has seen a half a dozen product tape-outs in MPW form with success.
We believe this technology will be very suitable for applications such as ultra-low power and ultra-low leakage MCUs, high-performance analog, RF, and other IoT-related applications. Mobile devices, such as handsets, continue to be the major growth driver in the near term. However, going forward, we also preparing for the new market opportunities in IoT and automotive. Our existing technology on power management, RF, embedded memory, and sensors can already address some of the needs in these new markets. Overall utilization was still above 100% in the fourth quarter, of which even the newly ramping fabs experienced strong customer demand and high utilization. We are happy to report that they are ramping very smoothly. There was strength in both communication and consumer-related applications, such as sensors for mobile device, set-top box, tablet, and TV.
To meet the strong customer demand and address the high utilization, we continue to strive to improve operational efficiency and grow our capacity. Shenzhen began operations and the full flow production in the second half of 2015, ending the year with a capacity of 13,000 8-inch wafer per month. By the end of this year, we target to install near 30,000 per month capacity in Shenzhen. Our Beijing joint venture fab begun production in Q4 2015 and ended the year with a capacity of 6,000 12-inch wafer per month. We target to increase this to 15,000 per month by the end of this year. Our Shanghai 12-inch fab ended the year with 14,000 12-inch wafer per month and is planned to expand to 20,000 by the end of this year. We continue to implement prudence in our CapEx spending and strive to improve structural profitability through capital efficiency.
Being in China has presented us with many opportunities, customers, relationship, and options for funding. Many customers, domestic and international, prefer to have a foundry partner in China. Regionally, our China revenue contribution has grown more than 25% year-over-year in 2015 compared to 2014. Eurasia revenue contribution has grown more than 50% year-over-year. Our Eurasia region includes Europe and Asia, excluding Mainland China. Meanwhile, North America has declined 9.3% year-over-year, but has begun to recover in the second half of 2015. With the large opportunities presented to us being in China, we strive to capture attractive prospects with profitability as our underlying objective. In order to address many of the opportunities at hand, we will consider accelerating growth through both organic and inorganic means. In conclusion, SMIC demonstrated strength in 2015, achieving historical highs in revenue, profitability, and the utilization.
We expect growth again in the first quarter of 2016 and to target 20% annual revenue growth in 2016. Despite uncertain market outlook in the industry, SMIC is optimistic given our strategy and execution track record. The first half looks strong, and we stay committed to maintaining sustainable profitability and building value for all shareholders. Thank you for listening, for your support, and for your time. I will now hand the call over to Yonggang for the financial highlights and 2016 Q1 guidance.
Okay. Thank you, T.Y. Chiu. Greetings to all our listeners. First, I will highlight our 2015 full year unaudited results and our fourth quarter 2015 results. Then we'll give our first quarter 2016 guidance. Revenue in 2015 was $2.24 billion, a record high compared to $1.97 billion in 2014. The increase was mainly due to an increase of wafer shipments. Gross margin in 2015 reached a record high of 30.5% compared to 24.5% in 2014. The increase was primarily due to improvements in fab efficiency in 2015. Profits for the periods attributable to SMIC in 2015 was $253.4 million, a record high compared to $153 million in 2014. Net profit margin was 11.3%, a record high compared to 7.8% in 2014. The 2015 capital expenditures for foundry operations were $1.4 billion and $172.2 million for non-foundry operations.
Our year-end cash on hand was $1.3 billion in 2015 compared to $1.2 billion in 2014. Utilization rate in 2015 was 100.7%, a record high compared to 91% in 2014. I will highlight our fourth quarter 2015 results. Our revenue was record high of $610 million in 4Q15, an increase of 7.1% quarter-over-quarter, and an increase of 25.6% year-over-year. Gross profit was $173.9 million in 4Q15, compared to $182.4 million in 3Q15, and $109.3 million in 4Q14. Gross margin was 28.5% in 4Q15, compared to 32% in 3Q15, and 22.5% in 4Q14. Profit for the period attributable to SMIC was $38.6 million in 4Q15, compared to $82.6 million in 3Q15, and $28.4 million in 4Q14. Looking ahead into the first quarter of 2016. Our revenue is expected to increase by 1%-3% quarter-over-quarter.
Gross margin is expected to range from 22%-25%. Non-GAAP operating expense, excluding the effect of employee bonus growth, government funding, and gain from the disposal of living quarters are expected to range from $121 million-$126 million. The non-controlling interests of our majority-owned subsidiaries are expected to range from positive $16 million to positive $18 million, which are losses to be borne by non-controlling interests. The planned 2016 capital expenditures for foundry operations are approximately $2.1 billion, while our planned 2016 capital expenditures for non-foundry operations are approximately $60 million. I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gao Yonggang, and thank you everyone for joining us today. I would now comment on the details of our last quarter financial results. On the income statement, revenue increased to $610.1 million in Q4 2015, up 7.1% Q on Q from $569.9 million in Q3 2015, mainly because of the increase of wafer shipments. Cost of sales increased to $436.2 million in Q4 2015, up 12.6% QOQ from $387.5 million in the previous quarter, mainly due to an increase of wafer shipments, and 2, additional manufacturing costs associated with the commencement of mass production of our new Beijing and Shenzhen fabs. Gross profit was $173.9 million in Q4 2015, down 4.6% QoQ from $182.4 million in the previous quarter. Gross margin was 28.5% in Q4 2015, compared to 32% in the previous quarter.
The decline in gross margin was mainly due to the ramp-up costs associated with the new Beijing and Shenzhen fabs. Operating expenses in Q4 2015 were $132.3 million, an increase of 22.4% QoQ from $108.1 million in Q3 2015. R&D expenses increased by $3.7 million QoQ to $66.1 million in Q4 2015, compared to $62.4 million in Q3 2015. Excluding the funding of R&D contract from the government, R&D expenses increased to $75.2 million in Q4 2015. Funding of R&D contracts from the government was $9.1 million in Q4 2015, compared to $9.6 million in Q3 2015.
General administrative expenses increased to RMB 67.3 million in Q3 2015, up 30.9% quarter-over-quarter from RMB 51.4 million in Q3 2015, mainly due to an increase in accrued employee bonus in Q4 2015, an increase of government taxes surcharges in Q4 2015, and the staff cost relating to our majority-owned project for bumping services in Jiangyin. Other operating income decreased from RMB 16.8 million in Q3 2015 to RMB 13.4 million in Q4 2015, mainly because of the lower gain realized from disposal of certain living quarters in Q4 2015.
Excluding the effect of employee bonus accrual, government funding, and gain from the disposal of living quarters, non-GAAP operating expenses were RMB 134.6 million in Q4 2015, compared to RMB 121.4 million in Q3 2015. Profit from operations in Q4 2015 was RMB 41.6 million, compared to RMB 74.2 million in Q3 2015. Other expenses was RMB 5.7 million in Q4 2015, compared to RMB 3.5 million in Q3 2015.
Foreign exchange losses was RMB 5.5 million in Q4 2015, compared to RMB 26 million in Q3 2015, mainly due to a devaluation of RMB against U.S. dollar in Q4 2015. The fair value change was RMB 3.4 million in Q4 2015, compared to RMB 25.5 million in Q3 2015. The fair value change was mainly due to gain arising from the put option, which was given by Jiangsu Changjiang Electronics Technology Co., Ltd. in connection with the acquisition of STATS ChipPAC. The income tax expenses was RMB 5.8 million in Q4 2015, compared to RMB 1.8 million in Q3 2015. The change in income tax expense was mainly due to the recognition of deferred tax expenses, resulted from tax and accounting temporary differences. Non-controlling interest was RMB 8.5 million of credit to SMIC's attributable profit in Q4 2015, compared to RMB 13.7 million in the previous quarter.
Moving to the balance sheet at the end of the fourth quarter 2015. Cash and cash equivalents increased to RMB 1 billion in Q4 2015 from RMB 741.6 million in Q3 2015. If including other financial assets, we had approximately RMB 1.3 billion cash on hand at the end of Q4 2015, compared to approximately RMB 1.2 billion in Q3 2015. Restricted cash was RMB 302.4 million in Q4 2015, compared to RMB 88.7 million in Q3 2015. The increase of mainly due to a low-interest cost entrusted loan from CDB Development Fund through China Development Bank, which will be used for future capacity expansions. Our long-term borrowing increased by RMB 307.5 million, and short-term borrowing increased by RMB 55.6 million compared to the previous quarter. At the end of Q4 2015, our total debt to equity was 33.8% compared to 26.6% in the previous quarter.
In terms of cash flow, we generated RMB 200.2 million of cash from operating activities in Q4 2015 compared to RMB 180.2 million in Q3 2015. On a full year basis, we generated RMB 669 million of cash from operations in 2015 compared to RMB 608 million in 2014. Cash used in investment activities increased to RMB 282.4 million in Q4 2015 compared to RMB 187.9 million in Q3 2015. Cash from financing activities changed from an inflow of RMB 8.9 million in Q3 2015 to an inflow of RMB 352.4 million in Q3 2015. To examine our revenue by application, the communication and consumer segments contributed 56.2% and 30% of our revenue, respectively, in Q4 2015 compared to 55.1% and 31.9% of revenue, respectively, in Q3 2015. On a full year basis, the communication and consumer segments contributed 51.5% and 36.1% of our revenue, respectively, in 2015.
Geographically, revenue from China contributed 45% of total revenue. Revenue from North America contributed 32.6% of total revenue. Revenue from Euro-Asia contributed 22.4%. On a full year basis, revenue from China contributed 47.7% of total revenue. Revenue from North America contributed 34.7% of total revenue. Revenue from Euro-Asia contributed 17.6%. In terms of technology, revenue from 28 nano contributed 0.3%. Revenue from 40, 45 nanometers contributed 16.6%. Revenue from 55, 65, and 90 nanometer contributed 24% and 2.9%, respectively. Meanwhile, 0.13 micron and above contributed 56.2% of total revenue. On a full year basis, revenue from 45 nanometers and below contributed 16.1%. Revenue from 55, 65 nanometers and 90 nanometers contributed 24.3% and 4.1%, respectively. 0.13 micron contributed 55.5% of total revenue.
In terms of our overall capacity, total monthly capacity at the end of fourth quarter was 284.3 thousand 8-inch equivalent wafers compared to 268.8 thousand wafers in the previous quarter. The change was mainly because of our Beijing majority-owned 12-inch fab entered into mass production. Our Shenzhen 8-inch fab expanded its capacity in Q4 2015. The overall utilization was 100.4% in Q4 2015 compared to 100.5% in Q3 2015. The overall utilization rate was 100.7% in 2015 compared to 91% in 2014. The planned capital expenditure for foundry operations for 2016 are approximately $2.1 billion, which are mainly for the expansion of capacity in our new Beijing fab, our 8-inch fab in Shenzhen, our 12-inch fab in Shanghai. Our new 12-inch joint venture with bumping services in Jiangyin, as well as on R&D equipment, mask shops, and intellectual property acquisition.
Of the $2.1 billion CapEx, $1.1 billion is attributable to our new Beijing fab, which is a joint venture, of which SMIC will fund $600 million CapEx to that fab. The planned 2016 capital expenditure for non-foundry operations are approximately $60 million, mainly for the construction of living quarters. I'll now hand the call back to En-Lin for 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.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone and wait for a name to be announced. If you would like to cancel your request, please press the pound or hash key. There will be a short silence while participants register for questions. Our first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes, thank you. I wanted to ask the first question on the robust growth outlook, for the 20%, to go through just a few more details behind what's driving the growth. If you could go into what you expect the key growth drivers, how much looks like it's coming from China versus the overseas customers, and also the profile. How much coming from eight-inch versus 12-inch or 28 nanometer?
I think in terms of the target growth in our revenue, the main drivers are two, actually three. We are expanding our 12-inch fab capacity in both our new Beijing fab and also in the Shanghai fab. We expect the fab will be relatively fully loaded for the rest of this year. That would be a major growth driver. At the same time, we're also expanding our eight-inch fab in Shenzhen, and we expect that will also be fully loaded. That will contribute to the top-line growth. In terms of geographically, we expect actually a pretty balanced growth among all the regions.
Okay. Could you talk a little on the applications you see driving that above-industry growth?
I think we're still very much in the mobile space. As you know, for our 12-inch capacity, will be mainly used for the 28 nano and also 40 nano productions. For the eight inch, there'll be a whole broad range of applications, including sensors, power management. All this will be growth drivers for us.
Okay. If I could follow up just on the fundraising, like with the increase in CapEx, you'll get some from the JV, but you're generating about $800 million operating cash flow, and maybe rise a bit. Could you talk about additional funding source if you need to do more for the higher CapEx? It looks like the development bank is a new option. Maybe talk about that option. Is that also lowering some of the borrowing costs and you have additional way? As part of that, you mentioned acquisitions, if you also see some pretty good opportunities out there that you may also have an acquisition, that could be in the near term.
Okay. Let me comment on the funding side first. We are projecting $2.1 billion CapEx. As you know, right now, we have about $1.3 billion cash on hand, which we can use to finance this CapEx. At the same time, this year, we are forecasting to generate about $900 million to $1 billion cash from operations. Together with the contribution from our partners in our Beijing fabs, we don't see any problem for us to fund this CapEx. Moreover, we have a relatively low gearing at this point in time. We have multiple options to raise that financing, including potentially from some policy banks in China. I think we are in a pretty comfortable funding position. In terms of when you mentioned about this M&A, as mentioned by TY in his script, we are actively looking at new opportunities for growth.
We are evaluating a whole range of opportunities. I don't think we are in a liberty to comment on it at this point in time.
Great, since it affects the growth profile and also the margin profile, could you talk full year, I think Q4 to Q4, you're growing capacity 20%. How should the capacity step up through the year? Also for depreciation. The margins are coming down for first quarter. How much depreciation kind of steps up through the year? Do you see most of the hit in first quarter then your expectations were at a trough for margin or a stabilization point for margins?
In terms of depreciation, we are forecasting this year, 2016, will increase to about $800 million, the increase will be quite steady throughout the year. It means we will see increase in every quarter. More or less in a linear fashion.
I guess capacity, we should assume linear capacity. Is the implication for margin, we've had the reset and we're pretty stable on margin from this level? With depreciation still coming down, we could see a little bit more pressure on margin?
Well, I think, as you know, one of the key driver for the gross margins on the utilization. Okay. I think right now we are looking at, a average annual gross margin that we can target to be low to mid-20s%. In terms of the quarterly fluctuation, all depends on the utilization, I think.
Okay, great. Thanks a lot.
Thank you for the question. Next question comes from the line of Steven Pelayo from HSBC. Please go ahead.
Gareth, amazing guidance, the 20% year-on-year revenue growth, significantly outperforming, but also with depreciation amortization up about 50% year-on-year. If you did over 30% gross margins last year, you're going to do low to mid-20s%. Seems like you'd have to do 25% for the full year, just to have flat gross profit this year. Are you going to have down gross profit in 2016?
Okay. Well, we don't guide for the net income, first of all.
Okay.
I'm sure the analysts can do a very good job in terms of modeling the net income. We feel that, right now, for this year, the focus is really driving the growth. I think SMIC is fortunate in terms of being open up to a lot of growth opportunity this year. We are investing a substantial amount of CapEx so that we can capture the growth. I think this is a phase that from a strategic point of view, I think the company's decided to move forward in terms of capturing growth for this year and next year.
I mean, forecasting the bottom line is very difficult. There's a lot of other things that are moving there. I guess I was just trying to look at the growth line and the EBIT line, given such a 500 basis points or more gross margin decline this year, despite 20% revenue growth. Have you thought a little bit about what kind of operating margins or operating profit targets for 2016?
No, we are not guiding for that. Yeah.
Okay, last question that is a struggle for me to kind of figure out the model, is the non-controlling interest line. I would assume as you ramp up more in this Beijing 2fab, that there's more of a kind of an add back that happens there. It was actually down quarter-on-quarter, but can you give us some guidance on at least the first quarter, but hopefully more on the full year for the non-controlling interest line? That would really help me.
Yeah, I think we guided the Q1 non-controlling interest in our guidance.
I'm sorry. Full year.
Yeah. for the full year, you're right. We do see that, because this non-controlling interest add on is mainly because of the losses that we share with our joint venture partner for new fabs. I expect this number on year-on-year basis should increase compared to last year.
It's absolutely going to increase. I guess in the first quarter year, we said it's a $16 million-$18 million number. How big could that get by the end of the year?
Yeah, we are not counting that for now. Yeah.
All right. Let me just sneak in one more then. R&D credits were down year-on-year despite 28 nanometer investments. Maybe a more favorable policy environment behind. I guess I'm a little bit surprised by that. Did your R&D credits kind of fall short of your expectations? What do you think about for 2016?
Yeah, I think we have some delay in Q4, in terms of the R&D grant, because as you say, this is all project-based and all depending on the number of factors, including the completion of a project, also the funding availability at the government. Okay. We do think that this grant will increase in 2016. Right now we are looking at a quite substantial increase in 2016, yeah.
Can you define quite substantial for me? That's my last question.
Well, you're very persistent. I think conservatively, we are looking at maybe about RMB 50 million to RMB 60 million.
Excellent. Thanks a lot, guys.
Yeah.
Thank you for the question. Next question comes from the line of Ken Hui from Jefferies. Please go ahead.
Thank you for taking my question. My first question is regarding your 1Q gross margin guidance, 22%-25%. If I try to compare with your gross margin in 4Q last year, would you be able to give me a breakdown of the impact according to the Beijing electricity outage, higher depreciation, and potentially other increases in costs? Will you be able to quantify the impact of each of these factors? That is my first question. Thank you.
I think the major impact on the gross margin is still coming from the ramp-up of our two new fabs. If you look at our depreciation, we are looking at a step up between Q1 and Q4 of about $20 million, in terms of depreciation for one quarter. Obviously, the power failure in Beijing also have some impact. The impact would be less compared to the first factor.
I see. For the full year on the gross margin, you also guide that it will be something in the low to mid 20% gross margin, and that seems to be quite similar to the 1Q gross margins as well. 1Q gross margin has already got impacted by the power failure. Are you suggesting that without the power failure, the gross margin may actually continue to trend down throughout the year?
As I said, this is our target gross margin for the average for a year. Obviously, right now, we cannot say this is exactly the number. We're giving a pretty broad range at this point in time. I think we are comfortable with this range.
Okay. Also, regarding your full-year guidance related to the capacity expansion as well as your revenue growth, I think if my model is correct, if you are adding this kind of capacity, and if you are growing 20% revenue, you are basically assuming full utilization for all the following quarters. If my argument is correct, is there a risk if there is maybe one or two quarters of misexecution, then you may not be able to meet your revenue growth guidance?
Not really, because actually, we are not assuming 100% utilization for all quarters, yeah. As I said, this is really a full-year outlook based on our full-year guidance, based on the current outlook, okay? That would be, as I say, we still need to execute the plan to ensure that this is achievable. Yeah.
Okay. Finally, I want to again ask about the long-term non-controlling interest, particularly for 4Q last year. I think your guidance was actually over $30 million, but you end up to be only $8.5 million. Could you please explain the differences over there?
Okay. Yeah. There's a difference in Q4. That is relating to the R&D cost-sharing with our Beijing fab. I think, when we gave the guidance, we expect the R&D cost-sharing would be finalized by the time we announce the Q4 results. I think there's some delay in terms of reaching this agreement with our joint venture partners. The negotiation is still going on, and we expect that will be booked in 2016. Yeah.
Is that included in your 1Q guidance already or not?
Not yet.
Okay. I see. That means the non-controlling interests may go up sometime in one of the subsequent quarters?
Yes.
Okay. Thank you very much.
Thank you for the questions. Next question comes from the line of Rick Hsu from Daiwa Securities. Please go ahead.
Yeah. Hi, good morning. Sorry for my voice, a little bit short as I got a cold here. I try to make myself clear as possible. Just talking about your depreciation, you say it's going to increase by $260 million-$280 million this year. Roughly, how much increase year-on-year for this year?
Roughly 50%.
Yeah. There's roughly about 50%. Yeah.
All right. Just like what Steven Pelayo said, about 50%. That is such a big increase. Do you see any upside to your depreciation? I'm saying, is there any source area, any source which we can save the depreciation cost to make it smaller?
Well, the depreciation cost actually all depends on the CapEx and the moving schedule for the equipment. This is based on, right now, our outlook, our plan for the rest of this year, in terms of the moving schedule for our new equipment and when our new capacity will come online. If there's any adjustment in this schedule, obviously, that will impact the depreciation schedules.
Right. Okay, fair enough. One more question is about your CapEx. Out of $2.1 billion, can you give us a more detailed breakdown? I know you're talking about $1.1 billion for Beijing joint venture fab. Can you give us more detailed breakdown for the rest?
The majority of them, as you expect, would be for the 12-inch fab for both our Beijing and our Shanghai fabs. A smaller portion would be for our Shenzhen fab.
I'm not sure exactly what you expect.
Yeah. You're talking about three breakdown here in your release. One is basically for the fab capacity build. The second is for the new joint venture you set up for R&D with 14 nanometer.
Right.
The third is for the R&D equipment and tools. I'm looking at the more detailed breakdown between capacity build and R&D purpose.
Okay. In terms of the R&D purpose, that would be about $160 million, in terms of R&D. Yeah. Out of the $2.1 billion. Yeah.
$150 million.
Yeah.
That includes the new joint venture company that you set up to build 14 nanometer, right? Or no?
That's right. Yeah.
I see. Okay. That's clear. Thank you so much.
Thank you.
Thank you for the question. The next question comes from the line of Zi Hou Ng from BNP. Please go ahead.
Hi. Good morning. By end of this year, what will be the revenue mix between High-K Metal Gate and PolySiON for your 28 nano business?
I think on a quarter basis, High-K Metal Gate is probably, maybe one eighth to one quarter of the total 28 revenue.
Mm-hmm. That is for which quarter?
Fourth quarter.
Fourth quarter, okay. All right. Okay, thanks. Second question, actually for the $2.1 billion CapEx this year, what would be the amount for all your JVs? Yeah.
Okay. We mentioned that for our Beijing JV is $1.1 billion.
Right.
We have another JV, which is for our bumping services in Jiangyin. That is about $80 million.
80. 8-0, right?
That's right.
Okay.
Yeah.
What's your holding in the wafer bumping JV right now?
It's 51%.
Okay. All right. Okay. Thank you very much.
Thank you for the question. Next question comes from the line of Roland Xu from Citigroup . Please go ahead.
Hi. Good morning. First question to me is for your depreciation schedule. Are you still using five years for eight inch and seven years for 12 inch for depreciation scheduling?
No. We have seven years for our 12 inch and six years for eight inch.
Okay. Six year for eight inch. Okay.
And that has been-
Yeah,
That has been the policy consistently. Yeah.
Okay. Yeah. Now we are sticking with this depreciation schedule. That means that this year we have about 50% year-on-year depreciation cost increase, with this depreciation schedule and with $1.5 billion CapEx spending last year and $2.1 billion this year. That means that depreciation next year or even 2018, definitely will be continued increase. Also under almost 100% gross utilization now. I'm worried about the longer-term gross margin. Is the gross margin next year or 2018, is any room for gross margin to be higher than this mid to 20 percentage point?
As we ramp our new fab, both the Shenzhen as well as our Beijing, as their scale increases, we see that definitely the cost should come down. In that sense, even though there is an increase in the depreciation part, I think the various variable costs and other costs should come down as well. There are such an opportunity as we look into the new fab to get to that scale.
Yeah. Understood. Yeah. Can we assume last year that more than 30% gross margin probably will be the peak gross margin in the near term, in the maybe near coming years?
I think, conservatively speaking, yes, you can expect that. We will try to work our way to reduce our various other costs. Yeah. I think as what TY mentioned, I think right now for the near term, the focus for a company is really driving the growth. Right now, I think we have tremendous opportunity open to us. We are really investing for the future.
Okay, understood. Yeah. Okay. Thank you. My second question is for your High-K Metal Gate 28 nanometer technology. Can you remind us, is your High-K Metal Gate, gate-first or gate-last technology?
High-K Metal Gate is a gate-last technology.
Okay. Yeah. For gate-last, I think this is what the leading foundry is using, this gate-last technology, and the majority of the customer are also adopting this gate-last technology. Question is, how are you going to differentiate your High-K Metal Gate technology with this leading foundry? Especially like TSMC, they have the enhanced version for the HPC or even HPC plus High-K Metal Gate technology. I think that actually, TSMC has been continuing improve the cost and also performance for its High-K Metal Gate. How are you going to differentiate your High-K Metal Gate technology with the leading foundry? Thank you.
I think this is a very good question. I think that the same question can be asked on our 40 a few years ago, then basically, I think looking at our 40 has been a very successful technology node. We see that 28 is also a very long technology node, and we'll be doing more work to add in additional feature to our High-K Metal Gate to differentiate. At this point, I'm not at the liberty to tell you exactly what we are planning to do. For sure that we will find a path to really make it a successful technology.
Okay. It sounds like on your, actually your position, your High-K Metal Gate as a performance enhancement and not just because the cost saving or cost benefit to customer. Am I reading you right? Or
We in the past had come out with various innovation in terms of the differentiation, I think that you can be sure that we will try to do that.
Okay, understood. Thank you.
This is what you have made is a good suggestion as well.
Hey, Roland, before you drop off, I want to also address you about a concern about the gross margin.
Okay.
Just that, in the last one, two years, I think a lot of concern being expressed in terms of our gross margin track by our new 12-inch fab in Shanghai. Actually, we are pleased to say that, as we ramp up the fab and the fab become more stable in terms of operations. Right now, the fab is operating at very close to corporate gross margin. I think, as I said, we are very confident as we continue to ramp up our two new fabs in Beijing and in Shenzhen. It will eventually go close to our average corporate margins.
Okay, understood. Actually, I think this is another concern is I think for last year, I think our company are always focused. Let's say that you are looking for profitability and growth on the profit. Also, I think the SMIC did reach your target, so you have very good gross margin. I think that you said that starting from this year and next year, actually you are looking for the revenue growth. I think, just kind of concern, how are you going to focus on this revenue growth and also at the meantime, you can also maintain a gross margin growth. Because I think that last year, 30% and this year, low to mid 20 percentage point. I think this is a big difference on that. This is I think is our concerns on that.
I think that if you can grow your gross margin above this, I think that probably would be appreciated, yeah.
Yeah, I think that it is clear that as we grow, there will be some, in the initial phase, especially to when we ramp a new fab, there is a pressure on the gross margin. Such was the case when we turned our Fab 8, our Shanghai 12-inch fab, from a R&D fab to a production fab. We do see, at that time, maybe two years ago, a significant drop in the margin. As we ramp it up, you can see that our margins recover and set new records.
Yeah, I want to clarify that.
Yeah.
I want to clarify that when we said that, the focus for growth in near term, we are not sacrificing our long-term profitability. It's just that, I think in the near term, because of the new CapEx, we may take a hit on the gross margin, we think that we're going to make up in the future.
Roland, we need to go to the next.
This is my question. Okay, thank you. Yeah, I will follow up later. Yeah. Thank you.
Thank you.
Ladies and gentlemen, thank you for your questions. I would now like to hand the call back. Allow me to take the last question from Patrick Liao from Macquarie. Please go ahead.
Okay. I have a few questions. Firstly, about the new factory you're going to build up in China for UMC and TSMC. How is the view for the competition for the new joiners, and do you think it's likely a subsidy to every semiconductor fab built in China, including Intel, Samsung, Hynix? In that sense, TSMC, UMC also might get a subsidy.
Well, first of all, I think that the fact that our peers in the industry are coming into China really proves that it is strategic to be present in China. SMIC, as a whole, has most of our operation in China. In that sense, we have really had the longest period of cultivating the customer relationship. We believe that we still will retain that local advantage despite the fact that our industry peer will be entering this market. It is difficult to say how much subsidy all these companies will get from the central government. I would refrain from commenting that.
Okay. If we are assuming that because some investor were challenging, during my dialogue that SMIC has been getting so much subsidy. I'm a little bit doubt that I think everyone will get a subsidy, so everyone will be the same. Do you think that would be the likely case and the likely right case?
Uh-
What I want to say is that, okay, some investor actually attacked. Sorry, there's a noise for fire alert, so I might have to hang up right now. Sorry.
Okay. I hope everything is safe and sound.
Thank you, ladies and gentlemen. Allow me to now hand the call back to CEO, Tzu-Yin Chiu, for closing remarks.
In closing, I would like to thank everyone who participated in today's call and all the good questions raised. Again, thank all of you, our shareholder, customers, employees, and the suppliers for their trust and the support. I'll see you next time. Thank you.
This is the end of SMIC's fourth quarter earnings conference call. We thank you for joining us today.