Welcome to the Semiconductor Manufacturing International Corporation's 4th Quarter 2015 Webcast Conference Call. Today's conference call is hosted by Doctor. GY Qiu, Chief Executive Officer Doctor. Yonggang Gao, Chief Financial Officer Mr. Gareth Kong, Executive Vice President of Strategic Business Development, Finance and Company Secretary and Mr.
Erling 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's 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 1 hour after the event at www dotsmics.com. Without further ado, I would like to introduce you to Mr. Erling Feng, Vice President of Investor Relations for a cautionary statement.
Good morning and good evening. Welcome to SMIC's 4th quarter 20 15 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 quarterly financial relations in the events and the presentations section. Before I turn the call over to Doctor. KY Chu, let me remind you that the presentation we will 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 risks 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 Limited, including our annual report on Form 20F filed with the U.
S. Securities and Exchange Commission on April 28, 2015. During the call, we will make reference to financial 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 will 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. TY Chu, for the opening remarks.
Thank you, Ernie. 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 4th quarter and 2015 full year achievements. We will also share with you our outlook for 20 16 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 Q4 of 2015, we achieved record high revenue of $610,000,000 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 6 percentage point increase in gross margin in Q4 2015 compared to Q4 2014 and an operating profit of 41.6 $1,000,000 in Q4 2015 compared to $1,600,000 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 2,240,000,000 a growth of 13.5 percent compared to 2014. When measured in RMB, 2015 growth reached 20%. In 2015, we also achieved historical highs on all natures of profitability, including gross margin, operating profit and the 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 begun to manufacture 28 nano technology and introduce SMIC's new ultra low leakage sparkle technology. With a great year behind us, we are well positioned to have a strong 2016.
Following our acceleration of R and 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 are adding significant new capacity. Our target 2016 year end installed capacity is 341,000 8 inches equivalent wafers per month, an increase of 20% over 2015 year end capacity. Our full year 2016 CapEx is projected to be US2.1 billion dollars As a result, our annual depreciation and amortization is expected to increase by approximately $260,000,000 to $280,000,000 Due to the fact that we are simultaneously ramping up 2 new fabs in 2016, we target the annual the average annual gross margin in 2016 is expected to decline to lowtomid20s. However, we target to maintain a healthy EBITDA margin of approximately 35% in 2016.
This is similar to 2015. As announced previously, on February 1, Beijing fab experienced a temporary power supply suspension. On February 3, 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 incidents, 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 the 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 $28,000,000 revenue in Q4 2015 grew 3 fold compared to Q3 2015. In addition, we are pleased to have announced earlier this week that our customer Leakor's Hi ks 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 49 O grew 15.2% quarter over quarter and 90 2.7% year over year. Our flexible 2840 capacity has enabled us to best utilize on mature lines with demand remains robust. Revenue from 0.1 micron to 0.13 sorry, 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 percent 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 sparkle technology has seen a half a dozen product tape out in MPW form with success. We believe this technology would 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 4th quarter, of which even the newly ramping fabs experienced strong customer demand and high utilization.
We are happy to report that very smoothly. There was strength in both communication and consumer related applications, such as sensors for mobile device, set top box, table, 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. Sensen began operations and the full flow production in the second half of twenty 15, ending the year with a capacity of 13,008 inches 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 6,012 inches wafer per month. We target to increase this to 15,000 per month by the end of this year.
Our Shanghai 12 inches fab ended the year with 14,012 inches wafer per month and is 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 have begun to recover in the second half of twenty fifteen. 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 Q1 of 2016 and the target 20% annual revenue growth outlook in the industry, SMIC is optimistic given our strategy and execution track record. So far, 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.
Thank you, T. Wei. Greetings to all our listeners. First, I will highlight our 2015 full year unaudited results and our Q4 2015 results. And then we'll give our Q1 2016 guidance.
Revenue in 2015 was 2 point $24,000,000,000 a record high compared to $1,970,000,000 in 2014. The increase was mainly due to an increase of wafer shipments. Gross margin in 2015 reached a record high of 30.5 percent compared to 24.5 percent in 2014. The increase was primarily due to improvement in fab efficiency in 2015. Profits for periods attributable to SMIC in 2015 was 200 and $53,400,000 a record high compared to 153 $1,000,000 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 1,400,000,000 dollars and $172,200,000 for non foundry operations. Our year end cash on hand was $1,300,000,000 in 2015 compared to $1,200,000,000 in 2014. Utilization rates in 2015 was 100.7 percent, a record high, compared to 91.91% in 2014. Now I will highlight our 4th quarter 2015 results.
Our revenue was record high of $610,000,000 in 4Q '15, an increase of 7.1% quarter over quarter and an increase of 25.6% year over year. Gross profit was $173,900,000 in 4Q 'fifteen compared to $182,400,000 in 3q 'fifteen and one $109,300,000 in 4q 2014. Gross margin was 28.5% in 4q 2015, compared to 32% in 3Q 'fifteen and 22.5% in 4q 'fourteen. Profit for the period attributable to FMC was $38,600,000 in 4Q4 'fifteen, compared to $82,600,000 in 3q15 and $28,400,000 in 4Q 'fourteen. Now looking ahead into the Q1 of 2016, Our revenue is expected to increase by 1% to 3% quarter over quarter.
Gross margin is expected to range from 22% to 25%. Non GAAP operating expense is causing the effect of employee bonus growth, government funding and gain from the disposal of linked quarters are expected to range from $121,000,000 to 100 and and $26,000,000 And the non controlling interest of our majority owned subsidiaries are expected to range from positive $16,000,000 to positive $18,000,000 which are losses to be borne by non controlling increase. The planned 2016 capital expenditures for foundry operations are approximately $2,100,000,000 while blended 2016 capital expenditures for non foundry operating are approximately $60,000,000 I will now hand the call over to Gary for more detailed financial commentary.
Thank you, Gao Zhong, 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 $610,100,000 in Q4 2015, up 7.1% Q on Q from $569,900,000 in Q3 2015, mainly because of the increase of wafer shipments. Cost of sales increased to $436,200,000 in Q4 2015, up 12.6% Q on Q from $387,500,000 in the previous quarter, of 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 170 $3,900,000 in Q4 2015, down 4.6% Q1Q from $182,400,000 in the previous quarter.
Gross margin was 20.5% 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 Samsung fabs. Operating expenses in Q4 20 15 were $132,300,000 an increase of 22.4 percent Q1Q from $108,100,000 in Q3 2015. R and D expenses increased by $3,700,000 Q on Q to $66,100,000 in Q4 2015 compared to $62,400,000 in Q3 20 15. Excluding the funding of R and D contract from the government, R and D expenses increased to $75,200,000 in Q4 2015.
Funding of R and D contracts from the government was $9,100,000 in Q4 2015 compared to $9,600,000 in Q3 2015. General and administrative expenses increased to 67.3 $1,000,000 in Q3 2015, up 30.9% Q on Q from 51,400,000 in Q3 2015, mainly due to an increase in accrued employee bonus in Q4 2015, an increase of government tax surcharges in Q4 2015 and the cost relating to our majority owned project for pumping services in Chang'an. Other operating income decreased by decreased from $16,800,000 in Q3 2015 to 13.4 dollars 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 $121,400,000 in Q3 2015. Profit from operations in Q4 2015 was $41,600,000 compared to $74,200,000 in Q3 2015.
15. Other expenses was $5,700,000 in Q4 2015 compared to $3,500,000 in Q3 2015. Foreign exchange losses was $5,500,000 in Q4 2015 compared to $26,000,000 in Q3 2015, mainly due to a devaluation of mainly due to a devaluation of RMB against U. S. Dollar in Q4 2015.
The same value change was $3,400,000 in Q4 2015 compared to $25,500,000 in Q3 20 15. The change in the fair value was the fair value change was mainly due to gain arising from the put option, which was given by Jiangsu Tamgen, the electronic technology Limited in connection with the acquisition of Stetchepaq. The income tax expenses was $5,800,000 in Q4 2015 compared to $1,800,000 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 $8,500,000 of credit to SMIC's attributable profit in Q4 2015 compared to $13,700,000 in the previous quarter.
Moving to the balance sheet at the end of the Q4 2015, cash and cash equivalents increased to $1,000,000,000 in Q4 2015 from 741.6 $1,000,000 in Q3 2015. If including other financial assets, we had approximately $1,300,000,000 cash on hand at the end of Q4 2015 compared to approximately $1,200,000,000 in Q3 2015. Restricted cash was $302,400,000 in Q4 2015 compared to $88,700,000 in Q3 2015. The increase was mainly due to a low interest cost and trusted loan from CDP Development Fund through China Development Bank, which will be used for future capacity expansion. Our long term borrowing increased by $307,500,000 and short term borrowing increased by $55,600,000 compared to the previous quarter.
At the end of Q4 2015, our total debt to equity was 30 3.8% compared to 26.6% in the previous quarter. In terms of cash flow, we generated $200,200,000 of cash from operating activities in Q4 2015 compared to $180,200,000 in Q3 2015. On a full year basis, we generated $669,000,000 of cash from operations in 2015 compared to 6 $8,000,000 in 2014. Cash used in investment activities increased to 282,400,000 dollars in Q4 2015 compared to $187,900,000 in Q3 2015. Cash from financing activities changed from an inflow of $8,900,000 in Q3 twenty fifteen to an inflow of $352,400,000 in Q3 2015.
To segment our revenue by application, the Communication and Consumer segments contributed 56.2% 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 segment contributed 51.5% and 36.1% of our revenue respectively in 2015. Geographically, revenue from China contributed 45% of total revenue and revenue from North America contributed 32 point 6% of total revenue. Revenue from EuroAsia contributed 22.4%. On a full year basis.
Revenue from China contributed 47.7% of total revenue and revenue from North America contributed 34.7% of total revenue. Revenue from EuroAsia contributed 17.6%. In terms of technology, revenue from Tunic Nano contributed 0.3%. Revenue from 4045 nanometers contributed 16.6%. Revenue from 55, 65 90 nanometer contributed 24% and 2.9% respectively.
Meanwhile, Pro 1.3 micron and above contributed 56.2 percent of total revenue. On a full year basis, revenue from 45 nanometers and below contributed 16.1%. Revenue from 55 nanometers and 90 nanometers contributed 24.3% and 4.1% respectively. 0.13 Micron contributed 55.5 percent of total revenue. In terms of our overall capacity, total monthly capacity at the end of 4th quarter was 284,300 8 inches equivalent wafers compared to 268,800 wafers in the previous quarter.
The change was mainly because of our Beijing majority owned 12 inches fab entering into mass production and our Shenzhen 8 inches fab expanded its capacity in Q4 2015. The overall utilization was 100.4 percent in Q4 2015 compared to 100.5 percent 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 $2,100,000,000 which are mainly for the expansion of and our new 12 inches joint venture with pumping services in Changying as well as on R and D equipment, smart shops and intellectual property acquisition. Of the CNY2.1 billion CapEx, CNY1.1 billion is attributable to our new Beijing fab, which is a joint venture of which SMIC will fund CAD 600,000,000 CapEx to debt fab.
The planned 2016 capital expenditure for non fund joint operation are approximately $60,000,000 mainly for the construction of living quarters. I'll now hand the call back to Erling for Q and A session.
Thank you, Gary. I would now like to open up the call for Q and A. As usual, please be reminded to limit your questions to 2 per person. Operator, please assist. Thank you.
Thank 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 8 inches versus 12 inches or 28 nanometer?
I think in terms of the target growth in our revenue, the main drivers are 2 actually 3. We are expanding our 12 inches fab capacity in both our new Beijing fab and also in the Shanghai fab. So we expect the fab will be relatively fully loaded for the rest of this year. So that would be a major growth driver. And at the same time, we're also expanding our 8 inches fab in Shenzhen and we expect that will be also be fully loaded.
So that will contribute to the top line growth. In terms of the geographically, we expect actually pretty balanced growth among all the regions.
Okay. And 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 we know for our 12 inches capacity will be mainly used for the 29 node and also 49 node production. And then for the 8 inches there'll be a whole broad range applications, including sensors, power management, all this will be growth driver for Okay. And 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 $800,000,000 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? And it looks like the Development Bank is a new option. Maybe talk about that option. Is that also lowering some of the borrowing costs in your additional way?
And as part of that, you mentioned that 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 CNY2.1 billion CapEx. But as you know, right now, we have about CAD1.3 billion cash on hand, which we can use to finance this CapEx. At the same time, this year, we are forecasting to generate about RMB900,000,000 to RMB1 1,000,000,000 cash from operations. So together with the contribution from our partners in our Beijing fabs, we don't see any problem for us to fund this CapEx.
And moreover, we have a relatively low gearing at this point in time. So we have multiple options to raise debt financing, including potentially from some policy banks in China. So I think we are in a pretty comfortable funding position. In terms of when you mentioned about this
M and
A, as mentioned in our by TY in the script, we are actively looking at new opportunity for growth. So we are evaluating a whole range of opportunities. But I don't think we are in a liberty to comment on it at this point in time.
Okay. And great. And 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%. Like how should the capacity step up through the year? And then also for depreciation, the margins are coming down for Q1.
How much depreciation kind of steps up through the year? Like do you see most of the hit in Q1 and then your expectation were kind of at a trough for margin or stabilization point for margins?
Okay. In terms of depreciation, we are forecasting this year 2016 will increase to about $800,000,000 and the increase will be quite steady throughout the year. It means you will see increase in every quarter, more or less in a linear fashion.
Okay. And I guess capacity, we should assume linear capacity. And then is the implication for margin where we've had the reset and we're pretty stable on margin from this level or with depreciation still coming down, we could see another 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. So I think right now we are looking at an average annual gross margin that we can target to be low to mid-twenty. But in terms of the quarterly fluctuation, it all depends on the utilization I think.
Okay. Okay, great. Thanks a lot.
Thank you for the question. Next question comes from the line of Stephen Polayo from HSBC. Please go ahead.
Yes. Gareth, amazing guidance, the 20% year on year revenue growth significantly outperforming, but also with depreciation and amortization up about 50% year on year. It seems like you have to do if you did over 30% gross margins last year, you're going to do low to mid-20s. It seems like you'd have to do 25% for the full year just flat gross profit this year. So are you going to have down gross profit in 2016 if?
Okay. Well, we don't guide for the net income, first of all. So I think I'm sure the analysts can do a very good job in terms of modeling the net income. But we feel that right now for this year, the focus is really driving the growth. And I think SMIC is fortunate in terms of being open up to a lot of growth opportunity this year.
So we are investing a substantial amount of CapEx so that we can capture the growth. So I think this is a phase that from a strategic point of view, I think the company has decided to move forward in terms of capturing growth for this year and the next year.
I mean, forecasting the bottom line is very difficult. There's a lot of other things that are moving there. But I guess I was just trying to look at the gross line and the EBIT line, given such a 500 basis point 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 20
16? No, we are not guiding for that.
Yes. 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, 2 fab that there's more of a kind of an add back that happens there. It was actually down quarter on quarter, but can you think give us some guidance on at least the Q1, but hopefully more on the full year for the non controlling interest line that would really help me?
Yes. I think we guided the Q1 non controlling interest in our guidance. I'm sorry.
Full year.
So 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 Newfabs. So I expect this number on year on year basis should increase compared to last year.
It's absolutely going to increase, but I guess in the Q1 you said it's a $16,000,000 to $18,000,000 number. How big could that get by the end of the year?
Yes, we are not counting that for now. Yes.
All right. Let me just sneak in one more then. R and D credits were down year on year despite 28 nanometer investments and maybe a more favorable policy environment. I guess I'm a little bit surprised by that. Did your R and D credits kind of fall short of your expectations?
And what do you think about for 2016?
Yes. I think we have some delay in Q4 in terms of the R and D grant. Because as you say, this is all dependent on it's all project based and all depending on the number of factors, including the completion of our project and also the funding availability at the government. So we do think that this plan will increase in 2016. So right now, we are looking at a quite substantial increase in 2016, yes.
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 $50,000,000 to $60,000,000 Excellent.
Thanks a lot guys.
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% to 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. So you'll be able to quantify the impact of each of these factors? That is my first question.
Thank you.
Okay. I think the major impact on the gross margin is still coming from our the ramp up of our 2 new fabs, okay. So if you look at our depreciation, we are looking at a step up between Q1 and Q4 of about $20,000,000 in terms of depreciation for 1 quarter, okay. But obviously, the power failure in Beijing also have some impact, okay. But the impact would be less compared to the first
factor.
Okay, I see. And then for the full year on the gross margin you also guide that you will be something in the lowtomid20 gross margin and that seems to be quite similar to the 1Q gross margins as well. But 1Q gross margin has already got impacted by the power failure. And so are you suggesting that without the power failure, the gross margin may actually continue to trend down throughout the year?
Okay. This is as I say, this is our target gross margin for the average for a year, okay. So obviously, right now, we cannot say this is exactly the number. So we're giving a pretty broad range at this point in time. So I think we are not are comfortable with this range.
Okay. And then also regarding your full year guidance related to the capital 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. Argument is correct, is there a risk if there is maybe 1 or 2 quarter of mis execution 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 here. So but based on as
I say, this is really
a full year guide full year outlook based on our full year guidance, based on the current outlook, okay? So that will be as I say, we still need to execute a plan to ensure that this is achievable. So yes.
Okay. And finally, I want to again ask about the long term interest, particularly for 4Q last year. I think your guidance essentially over RMB30 1,000,000, but you end up to be only like RMB8.5 million. So could you please explain the differences over there?
Okay. Yes, there's a difference in Q4. That is relating to the R and D cost sharing with our Beijing fab. I think when we gave the guidance, we expect R and D cost sharing will be finalized the negotiation negotiation is still going on, and we expect that will be booked in 2016.
Is that included in your 1Q guidance already or not?
Not yet.
Okay. Okay. I see. So that means the long term interest may go up sometime in one of the subsequent quarters?
Yes.
Okay. Thank you very much.
Thank you for Next question comes from the line of Rick Hsu from Daiwa Securities. Please go ahead.
Yes, hi, good morning. Sorry for my voice, a little bit short because I got a cold here. So I just want to make myself clear as possible. The targeted depreciation, you say it's going to increase by 260,000,000 to 80,000,000 this year. So roughly, how much increase year on year for this year?
Roughly 50%. Yes, it's roughly about 50%. Yes.
All right. So just like what Steven said about 50%, so that's such a big increase. Do you see any upside to your depreciation? I'm seeing is there any source area any source which we can save the depreciation cost to make it smaller?
Well, the depreciation depreciation cost actually all depends on the CapEx and the moving schedule for the equipment. So 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 come online. But if there's any adjustment in this schedule, obviously that will impact the depreciation schedule.
Right. Okay, fair enough. One more question is about your CapEx addition, out of RMB2.1 billion, can you give us a more detailed breakdown? I know you talked about $1,100,000,000 for Beijing joint venture fab. Can you give us more detailed breakdown for the rest?
The majority of them, as you expect, will be for the 12 inches fab for both our Beijing and our Shanghai fabs. And then a smaller portion will be for our Shenzhen
fab. So what
do you expect? What do you expect?
Yes. Because you're talking about 3 breakdowns here in your release. One is basically for the sub capacity bill. The second is for the NIO joint venture you set up for R and D over 14 nanometer. And the 3rd is sort of R and D equipment and tools.
I'm looking at more detailed breakdown between capacity build and R and D purpose.
Okay. In terms of the R and D purpose, okay, that will be about RMB160 1,000,000 in terms of RMB, yes, out of the RMB2.1 billion, yes.
So RMB150 1,000,000?
Yes.
That includes the new joint venture company that you set up to do the 14 nanometer, right, or no?
That's right. That's right. That's right. Yes.
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 Ziho Ng from BNP. Please go ahead.
Hi, good morning. By end of this year, what would be the revenue mix between HiQM EthylGate and Porty for your 28 nano business?
I think on a quarter basis, HiCan Metal Gate is probably maybe 1eight to 1 quarter of the total 20 revenue.
Thanks for which quarter, for Paul?
Q4.
Q4. Okay. All right. Okay. Thanks.
And second question, actually for the $2,100,000,000 CapEx this year, what would be the amount
for all your JVs?
Okay. We mentioned that for our Beijing JV is RMB1.1 billion.
Right.
And then we have another JV which is for our pumping services in Dunging. So that is about RMB 80,000,000.
RMB 80, right?
That's right. Okay. Yes.
And what's your holding in the wafer pumping 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 Chu from Citigroup. Please go ahead.
Hi, good morning. First question to me is for your depreciation schedule. Are you still using 5 year for 8 inches and 7 year for 12 inches inches for depreciation?
No. We have 7 years for our 12 inches and 6 years for 8
inches Okay, 6 years for 8 inches And
That has been the policy consistently, yes.
Okay. Yes. So now we are sticking with this depreciation schedule. So that means this year we have about 50% year on year depreciation cost increase. And with this depreciation schedule and with RMB1.5 billion capital spending last year and RMB2.1 billion this year.
So that means depreciation next year or even 2018 definitely will be continued increase and also under almost 100% growth utilization now. So I'm worried about the longer term gross margin. So is the gross margin next year or 2018? Is any room for gross margin to be higher than mid-twenty percentage point?
As well as our Beijing, as their scale increases, we see that on the definitely the cost we should come down. So 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. So there are such an opportunity as we look into the new fab to get to the scale.
Yes, understood. Yes. But so can we assume last year more than 30% gross margin probably will be the peak gross margin in the near term, maybe in the near coming
years? Well, I think conservatively speaking, yes, you can expect that. But we will try to work our way to reduce our various other costs.
Yes, but I think as what T. Y. Mentioned, I think right now for the D term, the focus for the company is really driving the growth. And right now, I think we have tremendous opportunity open to us. So we are reinvesting for the future.
Okay, understood. Yes. Okay, thank you. My second question is for your high k metal gate 20 nanometer technology. Can you remind us if your high k metal gate first or gate last technology?
HiK Metal Gate is Gate Labs technology.
Okay. Yes. So for GetLabs, I think this is what the leading foundry is using this GetLabs technology and the majority of the customer are also adopting this gate loss technology. So question is, how are you going to differentiate your high ks metal gate technology with these leading foundry, especially like TSMC that have the enhanced version for the HPC or even HPC plus high ks Metal Gate technology. I think that actually, DSMG has been continue to improve the cost and also performance for the high k metal gate.
So 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 and a few years ago that basically, I think looking at our 40, 40 has been a very, very successful technology node. And we see that 28 is also a very, very long technology node. We will be doing more work to add in additional feature to our high key metal gate to differentiate. So at this point, it's I'm not at the liberty to tell you exactly what we are planning to do, but for sure that we will find a path to really make it a successful technology.
Okay. So it sounds like actually you are positioning your high ks metal kit 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. What you have made is a good suggestion
as well. This
is what you have made is a good suggestion as well.
Roland, before you drop off, I want to also address you about a concern about the gross margin. Just that in the last 1, 2 years, I think a lot of concern has been expressed in terms of our gross margin track by our new 12 inches fab in Shanghai. But 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 fairly close to corporate gross margin. So I think it's just a as I say, we are very confident as we continue to ramp up our 2 new fabs in Beijing and Shenzhen. It will go 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 the company always focused and said you are looking for the profitability, growth on the profit. And also, I think the mix of the reach are your target, so you have very good gross margin. And I think you said starting from this year and next year, actually you are looking for the revenue growth.
But I think you're just kind of concerned how are you going to focus this revenue growth and also on the meantime at the meantime you can also maintain a gross margin growth because I think last year 30% and we see low 20 to mid 20 percentage, right? This is a big difference on that. So this is, I think, is our outcome on that. I think that if you can grow your gross margin above this, I think that probably will be appreciated.
Yes. I think that it is clear that as we grow, there will be some in the initial phase, especially when we ramp new fab, there is pressure on the gross margin. Such is the case such was the case when we turn our fab 8 no, yes, Fab 8, our Shanghai 12 inches fab from R and D fab to a production fab. And we do see at that time, maybe 2 years ago, a significant drop in the margin. And but then as we wrap it up, you can see that our margins recover and sets new
records. Yes.
And I want to clarify that when we said that focus for growth in near term, but 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, but we think that we're going to break
up in the future. Roland, we need
to go to the next.
Okay, thank you. Yes, I will follow-up later.
Yes.
Thank
you.
Ladies and gentlemen, thank you for your questions. I would now like to hand the call back. I'll let me
questions. I have a few questions. Firstly, about the new factory going to build up in China for UMC and TSMC. Do you think how's the view for the competition for the new joiners? And how likely do you think it's likely subsidy to every semiconductor fab built in China, including Intel, Samsung, Hynix,
so in
essence, TSM, UMC also might get 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. And SMIC as a whole has most of our operation in China. And in that sense, we have really had the longest period of cultivating the customer relationship. And so 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 that how much subsidy all these companies will get from the central government.
But I would refrain from commenting.
Okay. So if we are assuming that because some investment will challenge my dialogue that SMIC 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 will be the likely case and the likely right guess?
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, Doctor. Qiu, for closing remarks.
In closing, I would like to thank everyone who participated in today's call and all the good questions raised. And 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 SMI C's 4th quarter earnings conference call. We thank you for joining us today.