Welcome to the Semiconductor Manufacturing International Corporation's 3rd Quarter 2015 Webcast Conference Call. Today's conference call is hosted by Doctor. T. Y. Chu, Chief Executive Officer Doctor.
Yonggang Cao, Chief Financial Officer Mr. Gareth Kong, Executive Vice President of Strategic Business Development, Finance and Company Secretary Mr. An Lin Feng, Vice President of Investor Relations. Today's webcast conference call will be simultaneously streamed through the Internet's SMIC 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 how to participate. The earnings press release is available for download at www.smics dotcom. Webcast playback will also be available approximately 1 hour after the event at www.smics.com. Without further ado, I would like to introduce to you Mr. Ann Lin Sung, Vice President of Investor Relations for the cautionary statement.
Thank you, sir. Please go ahead.
Good morning and good evening. Welcome to SMIC's Q3 2015 earnings webcast conference call. For today's call, our CEO, Doctor. T. Y.
Qiu will first provide some general remarks. Afterwards, CFO, Doctor. Gao Yonggang will highlight our financial performance and give next quarter's guidance. And then our Executive VP of Strategic Business Development, Finance and the 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 presentation are available for you to download at our website under Investor Relations in the Events and Presentations section. Before I turn the call over to Doctor. T.
Y. Chu, let me remind you that the presentation we will be 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 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 United States Securities and Exchange Commission on April 28, 2015. During the call, we are making some references to financial measures that do not conform to Generally Accepted Accounting Principle, 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.
Ti Yiqiu for the opening remarks.
Thank you, An Lin. Greetings to everyone. Thank you all for joining us this quarter's call. Today, I'm pleased to share with you SMIC's 3rd quarter achievements, our business update and the future outlook. SMIC has achieved another quarter of record high revenue and earnings in Q3, undeterred by the industry corrections.
Our utilization remain high and as we guide an additional growth in quarter 4. We have successfully diversified our products and show resilience in the face of seasonally weaker market trends. In the Q3 of 2015, we achieved record high revenue of $569,900,000 a growth of 4.3% quarter over quarter, in line with our expectation and guidance. If excluding revenue from Wuhan, the revenue grew more than 2x 2x compared to the Q3 2013. Our record gross profit of $182,400,000 represents a gross margin of 32%, which exceeded expectations and guidance due to higher than expected utilizations, indicating a strong start to Q4.
We continue to believe that our performance compared to the industry is largely a result of careful execution of our strategy, which includes the diversification of products, technology and a close partnership with customers. Our strategy to grow our company in a profitable manner is to maintain high utilization and differentiate and diversify our product mix and advance our technology carefully on the leading edge in preparation for the migration of the application we serve. Profitability is our primary underlying objective. To address our 28 nano status, we have started to book more 28 revenue contribution in Q3 this year. Our target for Hi K Metal Gate is still the same, 2 to 3 quarters after Polycyon successfully ramped.
Our technology development team and the fab continues to generate an array of technology platforms, spanning from various flavor of 28 technologies, such as RF to tailor made technology to meet customers' unique applications. We currently have 9 customers engaged in 28 nanometers. In terms of differentiated technology on the mature fabs, demand remains robust. Revenue from 0.13 to 0.35 grew 9.7% quarter over quarter in Q3. We continue to expand our specialty technology portfolio, and I'm pleased to announce that our 95 ultra low power sparkle technology, which stands for SMIC's PolyContact for ultra low leakage, and we currently are in MPW and NTO stage.
This technology comparing to conventional 0.13 low leakage technology, it can pack 2x the logic density and 3x the SRAM density. And we believe it has the lowest SRAM standby leakage and as well as device leakage in the industry. In addition, we are able to incorporate high quality nonvolatile memory with only 2 additional mask. We believe this new technology will be very suitable for applications such as ultra low power MCU, high performance analog, RF and especially IoT related applications. It is a clear demonstration of SMIC's ability to deliver industry leading innovative specialty technology that is unique and very competitive.
Utilization was still above 100% in the 3rd quarter with strength in communications related applications such as for routers, wireless, PMIC for phones, sensors for phones, domestic baseband and optical networking. Continue to improve operational efficiencies and installing new capacities in order to grow our business. Shenzhen began operation and full flow production in September with a capacity of 11,000 8 inches wafer per month. By the end of this year, we target to have a total of 13 1,000 per month capacity in Shenzhen. This is lower than what was mentioned last time due to a change of plant product mix to product with higher layer counts.
As a result of operational efficiency improvements, our Shanghai 8 inches fab and Tianjin 8 inches fab each increased 1,000 1 ks per month capacity in Q3 compared to the previous quarters. Our 12 inches fab in Shanghai has remained unchanged at 14,000 per month capacity, mainly for 40,045 and R and D, of which 6 1,000 is capable for 28 nanometer. We plan to add another 20 28 capacities in Shanghai by the end of this year, as well as 6,000 per month capacity in Beijing, joint ventures fab. We continue to implement prudence in our CapEx spending and drive to improve structural profitability through capital efficiency. As example, our emphasis on capital efficiency, our year over year growth in production capacity in 2015 is an estimated 6%, while revenue is expected to increase more than 10%.
Our position in China plays an important role in SMIC's success in overall in all regions, With over 600 design a large China market, SMIC has long standing relationship in the IC industry in China that have contributed significantly to our growth. China revenue contribution has grown 24% year over year in Q3 2015 compared to Q3 last year. Eurasia revenue contribution has grown 41% year over year. Our Eurasia region include Europe and Asia, but excluding Mainland China. Also, after several years of rebuilding our Japan business, we have started to book revenue from Japan in Q3.
Meanwhile, North America has declined 15.3% year over year, but has begun to recover with 10% 10.4% gain quarter over quarter. I'm also pleased to announce that we newly received an investment grade credit rating from Moody's in additional to an investment credit rating from S and P. Domestically, we have received a AAA rating from Chinese rating company, China Chenxi International Credit Rating Company. This signifies the recognition and acknowledgment of SMIC's credible and improving financial health. In conclusion, we have achieved a strong 2015 so far.
Our best historically in terms of revenue, profitability and utilization. We expect growth again in the 4th quarter, which would represent 4th consecutive quarters of growth in 2015. When using Q4's low end guidance, our 2015 revenue is expected to grow more than 10% year over year. Our outperformance has been a result of SMIC's careful execution of our strategy, which includes the diversification of products and technology. We believe our mix of product customers and the dynamic fab backup makes SMIC nimble in this highly competitive foundry market.
We are careful in the expansion of our fab and the CapEx intensity intensive advanced technology. Meanwhile, we stay committed to maintaining sustainable profitability and building value for all stakeholders. Thank you for your time. I will now hand the call over to Yonggang for the financial highlights and 2015 Q4 guidance.
Thank you, Difei. Greetings to our listeners. I will now highlight our Q3 2015 results and our Q4 2015 guidance. Our revenue was a record high of $569,900,000 in 3Q 'fifteen, an increase of 4.3% quarter over quarter, an increase of 9.2% year over year. Gross profit was record high of 182,400,000 in 3Q 'fifteen, an increase of 3.4 percent quarter over quarter, an increase of 35% year over year.
Gross margin was 32% in 3Q 'fifteen compared to 32.3% in 2q 'fifteen and 25.9% in 3q 'fourteen. Profit for the period attributable to SMIC was $82,600,000 in 3q 'fifteen compared to $76,700,000 in 2Q 'fifteen and $47,500,000 in 3q 'fourteen. If closing the gain of commitment to grain shares and variance in 2Q 'ten, profit for the period attributable to SMIC was a record high in 3Q 'fifteen. Now, looking ahead into the Q4 of 2015, our revenue is expected to increase by 3.3% to 6% quarter over quarter. Gross margin is expected to range from 22% to 30%.
Non GAAP operating expenses excluding the effect of employee bonus accrual, government funding and gain from the disposal of living quarters are expected to range from $142,000,000 to $147,000,000 and non controlling interest of our majority owned subsidiaries are expected to range from positive $33,000,000 to positive $36,000,000 which are losses to bond by non controlling interest. I will now hand the call over to Gary for more detailed financial commentary.
Thank you, Gaozheng, and thank you for joining us today. Before I start the comment on the detailed financials, I just want to repeat that our gross margin is expected to range from 28% to 30%. Now I'll comment on the detailed financials. On the income statement, revenue increased to $569,900,000 in Q3 20 15, up 4.3% quarter on quarter from $546,600,000 in Q2 2015 mainly because of increase of wafer shipments. Cost of sales increased to $387,500,000 in Q3 2015, up 4.7% Q on Q from 370,200,000 dollars in the previous quarter mainly because of increase in other manufacturing costs in connection with the increase in wafer shipments.
Gross profit was a record high of $182,400,000 in Q3 2015, up 3.4% Q on Q from $176,400,000 in the previous quarter. Gross margin was 32% in Q3 2015 compared to 32.3% in the previous quarter. Operating expenses in Q3 2015 were 1 $108,100,000 a decrease of 6.6 percent Q1Q from $115,700,000 in Q2 20 15. R and D expenses increased by $7,200,000 Q on Q to $62,400,000 in Q3 2015. Excluding the funding of R and D contracts from the government, R and D expenses increased by $6,400,000 Q on Q to $72,000,000 in Q3, 2015.
The change was mainly due to higher R and D activities in Q3 2015. Funding
of R
and D contracts from the government was $9,600,000,000 in Q3 2015 compared to 10,400,000 dollars in Q2 2015. G and A expenses decreased to $51,400,000 in Q3 2015, down 1.3% Q on Q from $52,100,000 in Q2 2015. Other operating income increased to increased from $700,000 in Q2 2015 to $16,800,000 in Q3 2015 mainly because of the gain realized from the disposal of certain living quarters. Excluding the effect of employee bonus accrual, government funding and gain from disposal of living quarters. Non GAAP operating expenses were 121,400,000 in Q3 2015 compared to $110,900,000 in Q2 2015.
Profit from operations in Q3 2015 was $74,200,000 compared to $60,700,000 in Q2 2015. Other expenses was $3,500,000 in Q3 2015 compared to $11,900,000 of other income in Q2 2015. Foreign exchange losses were $26,000,000 in Q3 2015 compared to $5,000,000 gain in the previous quarter, mainly due to a devaluation of RMB against U. S. Dollar in Q3 2015.
Other gains decreased to $3,100,000 in Q3 2015 from $8,600,000 in the previous quarter. This is mainly caused by the lower revenue from our schools due to summer holiday and the low gain from investments in the financial products sold by banks in Q3 2015. The fair value change was $25,500,000 in Q3 2015. The change in the fair value was due to gain arising from a put option which was given by Jiangsu Tamgen Electronic Technology Company Limited in connection with the acquisition of Stetjipax. Non controlling interest were $13,700,000 of credit to SMIC's attributable profit in Q3 2015 compared to $5,000,000 in the previous quarter.
Moving to the balance sheet. At the end of the Q3 2015, cash and cash equivalents decreased to $741,600,000 in Q3 2015 from 766 $200,000 in Q2 2015. If including other financial assets, we had approximately $1,200,000,000 cash on hand at the end of Q3 2015 compared to approximately $1,300,000,000 in Q3 2015. At the end of Q3 2015 the assets classified as held for sale balance of 111,400,000 dollars were living quarter units which the group has committed to sell to its employees in the future. Our long term borrowings increased by $23,100,000 and the short term borrowing decreased by $62,200,000 dollars compared to the previous quarter.
At the end of Q3 2015, our total debt to equity was 26.6% compared to 20.2% in the previous quarter. In terms of cash flow, we generated $180,200,000 of cash from operating activities in Q3 2015 compared to $154,600,000 in Q2 2015 mainly because of change in working capital. Cash used in investment activities increased to $187,900,000 in Q3 2015 compared to $170,400,000 in Q2 2015. Cash from financing activities changed from inflow of $379,400,000 in Q2 2015 to an outflow of $8,900,000 in Q3 2015 mainly because of new shares issued to China Integrated Circuit Industry Investment Fund in Q2 2015. To examine our revenue by application, the Communication and Consumer segments contributed 55.1% and 31.9% in the revenue respectively in Q3 20 15 compared to 49.4% and 37.7% respectively in Q2 twenty fifteen.
Geographically, revenue from China contributed 47.9% of total revenue. Revenue from North America contributed 33.9% of total revenue and revenue from EuroAsia contributed 18.2%. In terms of technology, revenue from 49wool and below contributed 15.6%. Revenue from 55%, 65% and 90% contributed 22.2% and 4.1% respectively. Meanwhile, 0.13 micron and above contributed 57.8 percent of total revenue.
In terms of our overall capacity, total monthly capacity at the end of the Q3 was 268,800,8 inches equivalent wafers compared to 255,800 wafers in the previous quarter. The change was mainly because of new 8 inches fab in Shenzhen entered into mass production in Q3, 2015. The overall utilization rate was 100.5% in Q3, 2015 compared to 102.1% in Q2, 2015. Our planned 215 CapEx for foundry operations are expected to be approximately $1,450,000,000 The planned 2015 CapEx for non foundry operations mainly for the construction of living quarters are expected to be approximately 100,000,000 dollars I'll now hand the call back to Hanning for the Q and A section.
Thank you, Garrett. 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. Thank you. And operator, please assist.
Thank Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Okay. Yes, thank you. Good morning. I wanted to ask the first question. You've had a very strong performance on 8 inches and the mature 12 inches filling with a lot of new applications.
The 28, I guess, is the one area that's been slow to ramp up through this year. So maybe talk about some of the challenges you've had on 28 and then the opportunities as you go out, maybe starting where you have the initial volume Q4, but how you see that ramp playing out over the next year, let's say as a percent of revenue and broadening of customer base as we go through the next year or if you think it might be another slow year or slow few quarters before it gets going?
Hi, Randy. Thanks for the question. We believe that our ramp actually is consistent with what we have stated to the Street in the past earnings release, we consistently have said that we'll get PO in the 2nd quarter and have a small shipment in the 3rd quarter and increase our shipment in the 4th quarter. And so in this quarter, indeed, we have shipped small volumes out. And next quarter, we will increase our shipment significantly.
Indeed, however, we are seeing some weaknesses in the market. And so therefore, I think the ramp up is not as strong as could be expected. But we do see that next year, there will be significant ramp up. By the end of the next year, we should see about as the 4th quarter in the double digit as a percentage of revenue.
Okay. That's great. So then with the 28, I guess, it sounds like it will have a more material ramp. Could you go through again the how we should think about the cost structure side for because gross margins are holding up, and I think because you've kept all the existing capacity very full with the new applications. So as 'twenty eight ramps up, just the impact that we should expect on the margin and on how depreciation loading would increase through next year?
Because Randy, as you know, we are in the process of ramping up 2 fabs concurrently, the Sudden fab and in Q4. The Sudden fab actually gone into production in Q3 and our new Beijing fab will go into production in Q4. So there will be increase in our depreciation. We expect in Q4, depreciation will go up by about $15,000,000 and then next year, there will also be a substantial increase on depreciation. So inevitably, there will be some downward pressure on our gross margin.
But we are still very positive because as we fully ramp up the fabs, we're going to see substantial increase in our revenue.
That's correct. I think that we will also be able to, as we increase the capacity to fully load the capacity with a mixture of 40 as well as 28. And that is probably the most important part.
Okay. And for 8 inches where you're running full or even at max now, how fast do you plan to ramp the Shenzhen, like how much additional capacity can you get on that?
Okay. Next year, we plan to ramp up to 30,000 wafer per month. That is on the standard 0.18 layers. Of course, if there are a change in the product mix that require higher layers count and certainly it will be at a lower shipment amount. But I think the value is going to be there.
Okay. Thanks a lot and good job on the results.
Thank you.
Thank you. Your next question comes from the line of Steve Palaiya from HSBC. Please go ahead.
Yes, can we start with our
operating expenses? I think last quarter you guys added roughly $135,000,000 to $140,000,000 and I think the actual was $108,000,000 reported, but if we exclude a bunch of things, it was $120,000,000 So I guess even on kind of an apples to apples base, it was significantly lower. And now when I look at your guidance for Q4, it actually steps up quite a bit as well. So I guess I'm a little confused on what kind of ongoing operating expenses are here and why there's so much volatility versus your guidance each quarter?
Yes. In Q4, we do expect our OpEx to be higher because we well, generally, if you look at follow our company in the last few years, Q4 came to be tend to have a high OpEx compared to other quarters. And secondly, we are actually working very hard in terms of R and D teams, in terms of trying to accelerate R and D activities. So that's one reason for that. And also because actually we're going to have quite a few new take outs in our new technologies in Q4.
So there will be some expenses relating to making a mask for the new take outs. So that account for the increase in the OpEx in Q4.
And do you expect any more property disposals or R and D grants in 4Q?
I think our R and D grant guidance for the year remains the same, which is about $40,000,000 to $45,000,000 And then we're going to have as you can see from our balance sheet, we do have a certain given quarter that we have put as asset for sale. So that will going to take place over the course of the next 1 or 2 quarters.
Okay. And then last question for you, Gareth. You mentioned 2016 depreciation would substantially increase. Can you give us a little bit more color on how much that means?
Okay. If you look at our CapEx this year and I think the ramp up for continued ramp up in our Beijing fab and Shenzhen fab next year, I think the increase in the decreasing would be fairly substantial.
Can you quantify it for us?
I think you should be the range of about 30% to 40% increase, yes.
Okay. And then last question just quickly for T. T. Roy. About your specialty applications, I'm wondering if you can help us understand how big these are for you.
I don't know, maybe run through a few of them. How big is CMOS image sensors? And with BSI growing, how big could it be? Talk a little bit about maybe some of your specialty memory areas and how much they contribute as a percentage of revenues, smart cards, fingerprint sensors. Can you just give us some color on some of these kind of specialty areas and how big each of them may be?
Maybe let me say that if we you are referring to the specialty technology that we have just mentioned, I can tell you that our gross size per wafer can increase about 80%. So that is a very, very competitive technology. So we look forward to apply this technology across the fab.
And just go ahead.
Go ahead.
I was just asking on some specific areas like how big is CMOS image sensors for you today and how big is fingerprint sensors and smart cards and see if there is some color you can give us on what kind of revenue contribution these are having for you?
Okay. Adding together all the specialty technology, I think it's around 40% of our revenue.
Okay, fair enough. Thank you.
Thank you. Your next question comes from the line of Leaping Huang from Nomura. Please go ahead.
Thank you for taking my question. So two questions. One is, in last few months we see quite a lot of the cross border M and A in the China Semiconductor Invester, including Tsinghua's INI Group's 80,000,000,000 ramping up your internal ramping up your internal capacity. Do you also seek any non organic growth opportunity to leverage this favorite environment? This is first question.
Okay. In the last quarters, if you mean inorganic growth, we continue to look for opportunity in this area, but we definitely are monitoring the situations. So yes, we are interested in. In the last quarters, indeed, we still were successful to buy a significant portion of fab to get hold of a significant set of secondhand equipment to outfit our sensitive fab.
I think just to add on to what TUI said, I think we have been fairly active in terms of looking at opportunities in the past 12, 24 months. But I think given the strong market actually we do not find a very attractive target. But depending on how the industry will pan out in the next few quarters, there could be a downturn in industry and that could be turn out to be a very good opportunity for us.
So you are still focused on the foundry the logic foundry business because there's discussion whether China should do memory or the DRAM or this. So your key focus is on the logic foundry business. Is my understanding correct?
That's correct. Our main focus is still on our core business, which is logicfoundry.
Okay. The second question is, in September, you established a semiconductor equipment leasing company with the National IC Fund. So could you share your plan on how you leverage this? If I understand it correctly, they have quite large funding source. So what's your plan to use leverage this leasing company?
And what will impact our P and L? I think this really question is what's your plan on the 20 sixteen's CapEx is whether including whether you can offload some of the CapEx to the leasing company? Thank you.
Okay. Well, first of all, our investment in leasing company, we're just a minority shareholders in the leasing companies. And I think if you look at the the overall market for the leasing business in China for the high-tech industry, not just for foundry, but overall for high-tech industry, I think an additional an additional source of funding for us as we found appropriate for our funding structure. So I think that is the rationale for us to participate in this investment.
So do you have any color for the next year's CapEx now?
We are looking at various options, including some of the leasing options to fund our 2016 CapEx. But that option needs to be favorable enough for SMIC.
Okay. Thank you.
Thank you. Your next question comes from the line of Ken Hoi from Jefferies. Please go ahead.
Good morning. Thank you for taking my questions. My first question is specifically on fingerprint sensor, which seems to be a strong growth driver for your company. So can you talk about the revenue contribution from fingerprint sensor and what is the outlook into next year? Would you find any capacity constraint to satisfy the demand from your customer?
That is my first question.
We do think that fingerprint sensor is going to be a very important application because more than just hand phones. So we continue to invest in these technologies. But we don't usually we don't normally break out in terms of our contribution by certain applications. So but this is one of the specialized technology that we have been investing R and D in the past and we are actually seeing pretty strong business from this area.
Would you be able to comment that? Sorry.
I just wanted to say that as far as the capacity constraint, we are working full speed to make sure that our customer are fully served, but in all areas as well. And I
do want to comment that as far as the fingerprint sensor is concerned, actually have quite a number of customer engagements.
Would you be able to comment that you will be more than or less than 10% of your revenue going into next year?
I'm sorry, we don't comment on that.
Okay. No problem. And then I think in the earlier comment you mentioned that you begin to see contribution from your Japanese customer. Can you help us understand what kind of product is it?
We can mention that it is a specialty technology as well as a logic conventional logic technology. So there are a number of customers, so they cover different portion and different stage of technology.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Bill Lu from Morgan Stanley. Please go ahead.
Yes. Hi. Good morning and thanks for taking my question. Doctor. Chu talked about the change in capacity plans for the SINs and fab that you are seeing demand for more layer type of applications.
Hello, can you hear me okay?
Yes, yes.
Yes. So
can you give me some color on that? Because if my notes are right, I think previously, you had planned on 20,000 wafers by the end of the year. So it's a pretty material change in the capacity. What kind of applications or applications are driving change? And also financially, are you able to get payback in terms of higher ASP by making these wafers with more layers?
And what's the margin implication as well? Thanks.
Yes. Mainly, the number of metal layer has increased significantly. And so that has impacted the overall wafer out. But however, I think that we get ASPs based on the number of consideration, including the number of layers.
I guess I'm just wondering if you look at revenues out of 13,000 wafers versus 20 previously but more layers, is the revenue and margin better or worse?
I think that the margin is actually equal or better as we look into next year.
And what about top line?
Yes, I think as what T. Y. Said, we should reprice our services. One of the key determinant will be the number of layer. So obviously, highly comp, high ASP.
Okay. I understand that your drivers are a little bit different from some of your competitors outside of China. But if I talk to the foundries in Taiwan, it seems like many of them have seen rush orders recently, especially for 18 to wafers, for driver IC, for power management IC, etcetera. I'm wondering if you could just tell us what you've been seeing recently?
I think as you can see that now we have been relatively fully loaded over the last few quarters and in the Q4, we are still seeing a strong loading. And we see this fairly consistent loading into the first half of first quarter. So I think we are cautiously optimistic that the loading will remain the same.
Okay, great. Thank you.
Thank you.
Thank you. Your next question comes from the line of Roland Xu from Citigroup. Please ask your question. All right, he has disconnected. We'll take the next question from the line of Suji Desilva from Tobeykar Capital.
Please go ahead.
Hi guys, congratulations on the strong results here. I think you started to answer this question, but the 130 nanometer and above products, would you expect that to have seasonal behavior in 2016 or will program ramps be able to drive the kind of sequential growth per quarter similar to what you've seen in 2015?
Okay. Our growth, yes, indeed, right now we are trying to install as much capacity in the 8 inches as we possibly can. And we expect that we hope and we target that the 8 inches capacity will remain fairly heavily loaded throughout 2016.
Yes. If you look at our target end of the year 2016 8 inches capacity compared to our current 8 inches capacity, I think it's talking about our 20% increase.
Great. That's helpful numbers. And then on the 28 nanometer, I know you talked about double digits by the end of 2016. Do you expect that to be a fairly linear ramp or do you think that's more back end loaded as you get 28 nanometer going? Thank you.
I think we are expecting to be more back end loaded, yes.
Okay, terrific. Thanks guys.
Thank you. Your next question comes from the line of Si Ho Ng from BNP. Please go ahead.
Hi, good morning gentlemen. Just want to touch on the non operating side, the change in the fair value change, is it something tied to JSA share price or it will be based on some formula? Yes, I just want to have some idea how to model for that part going forward.
Okay. Let me explain a little bit because I'm sure this is confusing to a lot of people. When we invest in the consortium that acquired Stetchepaq actually we have received a sort of a downside production from Zhang Changdian in terms of guaranteeing a return for us for these investments. So actually the behavior of these options, we're going to the business is a standard loan derivatives. So we need to vary on a quarterly basis.
But interestingly, I think this behavior of this change in the fair value will work inversely with the performance of Statuepack. So in other words, when Statuepack's performance get worse, this value of the option option value will increase and vice versa.
Okay. And you mean the financial performance of Astatia Pack, right?
Yes, financial performance, yes.
Okay, okay. Got you. Okay. And second question also on the non op side. The entity Changjiang Xinche, what is that company's business?
That is the SPV that was set up for the acquisition of StetiPec.
Okay, all right, okay. Got you. And last question, for the utilization, theoretically Yes. We
Yes, we are very, very close to our theoretical maximum capacity now.
Okay. All right. Okay. Thank you very much. Congratulations.
Thank you.
Thank you. Your next question comes from the line of Rui Lin Shi from Citigroup. Please go ahead.
Hi, sorry for the technical issue earlier. Yes. My first question is looking at your 3Q, the total wafer shipment increased by 5%, but the total non depreciated cost of goods sold declined by 1 percent. So why was that? Is mainly from this product mix change or is it mainly due to your cost reduction effort?
And how sustainable it will be going forward?
Okay. I think actually if you look at our total depreciation, it did not change quarter on quarter, okay. But I think what is being captured
in the depreciation being captured
in the cost of goods sold actually somewhat reflect the fab loading. The higher the fab loading, more depreciation is being absorbed into the fab, okay. So what it means is that we are running at very, very high loading in the fab right now. So I think that explains the change in the depreciation,
Yes. But I talked about the non depreciation cost.
The non depreciation
cost actually has gone up in Q3 compared to Q2.
Yes, but for the total I think actually it probably will add a smaller magnitude compared to the wafer shipment increase. So is that mean mainly due to you have more product mix on the 0.18, 0.5 wafers or is this due to you have this continuous cost reduction wafers on your fab?
Our increase in shipment is 5.4 percent and then our increase in other manufacturing cost within the cost of goods sold is 6.9%. So actually I think it's very much in line.
Okay. Yes. Okay. Yes. Thank you very much for clarifying.
And next question is for the reasons M and A in China, do you see any order flows change according to this MMA? And also going forward, how are you expecting the order flows change because of this MMA activities in China? Thank you.
I'm sorry, can you repeat your question again?
Yes. I think for recently we have a lot of the industry consolidation happening in China. And do you see any order flow change because of this industry consolidation? And going forward, are you expecting any order flow change because of consolidation in the industry?
Well, first of all, I think we do see some consultation in the industry globally for the semiconductor industry, okay. But as far as we are concerned, we don't see any change in our business prospect. As a matter of fact, we see opportunity for us to penetrate into some new customer through this M and A in the among our customers.
Okay. So you do expect going forward, you probably will try to penetrate into this new MMA business in for your business, right?
Yes, definitely. As a matter of fact, it may not specifically relating to the M and A, but actually a lot of the global customers seeing the value to have the production in China because of the right now the China's the IC supply chain is a lot more robust now than a few years ago.
Yes, understood. Yes, I think last question is on most of your peers, foundry peers they are seeing 4Q revenue to decline quarter on quarter. However, you are guiding still growing 4Q. So where does this strength come from? Thank
you. I think this strength come from both very strong loading in 8 inches as well as our 12 inches fabs. As a matter of fact, indeed some of our customers have been impacted by inventory adjustment issues. But because of the our strategy to diversify in terms of our customers and the product and the technology, I think that we are seeing very strong orders coming from new customers, leveraging new technologies. So we that is the basic reason why we have continued to perform above industry peer.
Thank you. So you said some of your customers haven't impacted by this inventory correction. Can you give us some more colors what kind of these customers are? Thank you.
Let me give you an example. And we have 10 customers. Those were 10 new customers in these 10 customers has given us a revenue of $90,000,000 in 2012. These 10 customers in 2015 is forecasted to give us a revenue up to $700,000,000
or above.
And so in that sense that we were able to actually capture a lot of new growing customers that is really compensating to some of the weakness of smartphone inventory adjustments. And these customers come from all regions of the world.
And from all of the segments, And from all of the segments, is this mainly for communication or from consumer or this is across the board?
Across segments.
Okay. Thank you. So how about these 10 customers business projection next year?
I think we continue to believe that they will be performing very well.
Your last question comes from the line of Rick Su from Daiwa Securities. Please go ahead.
Yes, hi, good morning guys. And yes, congratulation to your strong results. Just one question on your Q3 non controlling interest. I think it's roughly about $13,000,000 but I think can you explain this item a little bit more because I think I kind of missed out your explanation earlier. And also elaborate the guidance of $33,000,000 to $36,000,000 non controlling interest in Q4.
Would that be an additional addition to your total bottom line or something?
Okay. The non controlled interest is relating to some of the joint venture that have been set up by SMIC because we don't wholly own the subsidiary. So if joint venture are incurring losses, some of the losses will be attributable to the non controlling interest. That will be an impact to our net income. So I think that's why you see that actually the number will be positive.
And then for the Q4, the increase is because as the same as end of last year, we do have arrangement that we will share some of R and D expenses with our B2 fabs. So that is a portion that is that will be attributable to the B2 other shareholders.
I think my real question is how going forward, how are we going to model this item, say in 2016 or 2017?
Well, actually, no. The way you model, you should look at the profitability of this joint venture, okay. But I understand there are some difficulties with how the analyst could moderate, especially in the beginning phase of this joint venture operations. So we have taken a step to give the guidance on this item on a quarterly basis.
I see. All right. Thank you so much.
Thank you. I would now like to hand the call back to CEO, Doctor. Qiu, for closing remarks.
In closing, I would like to thank everyone who participated in today's call and again thank all of our shareholders, customers, employees and suppliers for their trust and the support. I'll see you next time.
This is the end of SMIC's 3rd quarter earnings conference call. We thank you for joining us today. Goodbye.