Welcome to the Semiconductor Manufacturing International Corporation's third quarter 2015 webcast conference call. Today's conference call is hosted by Dr. T.Y. Chiu, Chief Executive Officer, Dr. Yongg ang Gao, Chief Financial Officer, Mr. Gareth Kung, Executive Vice President of Strategic Business Development, Finance, and Company Secretary, and Mr. En- Ling Feng, Vice President of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet as 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.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 to you Mr. An Ling Fun, Vice President of Investor Relations, for the cautionary statement. Thank you, sir. Please go ahead.
Good morning and good evening. Welcome to SMIC's third quarter 2015 earnings webcast conference call. For today's call, our CEO, Dr. T.Y. Chiu, will first provide some general remarks. Afterwards, CFO, Dr. Gao Yong gang, will highlight our financial performance and give next quarter's guidance. 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&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 Dr. T.Y. Chu, let me remind you that the presentation we'll be making today includes forward-looking statements.
These statements and other comments are not guarantees of future performance but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and 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 28th, 2015. During the call, we're making some references 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. Chu, for the opening remarks.
Thank you, En-Ling. Greetings to everyone. Thank you all for joining us this quarter's call. Today, I'm pleased to share with you SMIC's third quarter achievements, our business update, and the future outlook. SMIC has achieved another quarter of record high revenue and earning in Q3, undeterred by the industry corrections. Our utilizations remain high as we guide an additional growth in quarter four. We have successfully diversified our products and show resilience in the face of seasonally weaker market trends. In the third quarter of 2015, we achieved record high revenue of $569.9 million, 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 two times compared to the third quarter 2013.
Our record gross profit of $182.4 million 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 utilizations 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 High-K Metal Gate is still the same, two to three quarters after PolySiON successfully ramps.
Our technology development team and the fab continue to generate an array of technology platforms, spanning from various flavors of 28 technologies, such as RF, to tailor-made technology to meet customers' unique applications. We currently have nine customers engaged in 28 nanometers. In terms of differentiated technology on the matured 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 Poly Contact 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 two times the logic density and three times the SRAM density. We believe it has the lowest SRAM standby leakage as well as device leakage in the industry.
In addition, we are able to incorporate high-quality non-volatile memory with only two additional masks. 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 third quarter, with strength in communications-related applications such as for routers, wireless, PMIC for phones, sensors for phones, domestic baseband, and optical networking. To address the strong utilization, we 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-inch wafer per month. By the end of this year, we target to have a total of 13,000 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 eight-inch fab and Tianjin eight-inch fab each increased 1K per month capacity in Q3 compared to the previous quarters. Our 12-inch fab in Shanghai has remained unchanged at 14,000 per month capacity, mainly for 40, 45 and R&D. Of which 6,000 is capable for 28 nanometer. We plan to add another 2,000 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 all regions. With over 600 design houses in China and many international customers desiring to penetrate 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 includes Europe and Asia, but excluding mainland China. 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 10.4% gain quarter-over-quarter.
I am 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&P. Domestically, we have received a triple A rating from Chinese rating company, China Chengxin 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 fourth quarter, which would represent fourth consecutive quarter 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-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 highlight and 2015 Q4 guidance.
Okay. Thank you, T.Y. Greetings to our listeners. I will now highlight our third quarter 2015 results and our fourth quarter 2015 guidance. Our revenue was a record high of $ 569.9 million in 3Q15, an increase of 4.3% quarter-over-quarter, and an increase of 9.2% year-over-year. Gross profit was a record high of RMB 182.4 million in 3Q15, an increase of 3.4% quarter-over-quarter, and an increase of 35% year-over-year. Gross margin was 32% in 3Q15 compared to 32.3% in 2Q15 and 25.9% in 3Q14. Profit for the period attributable to SMIC was RMB 82.6 million in 3Q15, compared to RMB 76.7 million in 2Q15 and RMB 47.5 million in 3Q14. Excluding the gain of commitment to grant shares and warrants in 2Q10, profit for the period attributable to SMIC was a record high in 3Q15. Looking ahead into the fourth quarter of 2015. Our revenue is expected to increase by 3%-6% quarter-over-quarter.
Gross margin is expected to range from 22%-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 RMB 142 million-RMB 147 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from positive RMB 33 million to positive RMB 36 million, which are losses to bond by non-controlling interests. I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gao Yong. Thank you for everyone 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%-30%. Our comments on the detailed financials. On the income statement, revenue increased to RMB 569.9 million in Q3 2015, up 4.3% quarter-on-quarter from RMB 546.6 million in Q2 2015, mainly because of an increase of wafer shipments. Cost of sales increased to RMB 387.5 million in Q3 2015, up 4.7% Q-on-Q from RMB 370.2 million in the previous quarter, mainly because of an increase in other manufacturing costs in connection with an increase in wafer shipments. Gross profit was a record high of RMB 182.4 million in Q3 2015, up 3.4% Q-on-Q from RMB 176.4 million 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 $108.1 million, a decrease of 6.6% quarter-over-quarter from $115.7 million in Q2 2015. R&D expenses increased by $7.2 million quarter-over-quarter to $62.4 million in Q3 2015. Excluding the funding of R&D contracts from the government, R&D expenses increased by $6.4 million quarter-over-quarter to $72 million in Q3 2015. The change was mainly due to higher R&D activities in Q3 2015. Funding of R&D contracts from the government was $9.6 million in Q3 2015 compared to $10.4 million in Q2 2015. G&A expenses decreased to $51.4 million in Q3 2015, down 1.3% quarter-over-quarter from $52.1 million in Q2 2015. Other operating income increased from $0.7 million in Q2 2015 to $16.8 million 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 $121.4 million in Q3 2015 compared to $110.9 million in Q2 2015. Profit from operations in Q3 2015 was $74.2 million compared to $60.7 million in Q2 2015. Other expenses was $3.5 million in Q3 2015 compared to $11.9 million of other income in Q2 2015. Foreign exchange losses were $26 million in Q3 2015 compared to $5 million of gain in the previous quarter, mainly due to a devaluation of RMB against U.S. dollar in Q3 2015. Other gains decreased to $3.1 million in Q3 2015 from $8.6 million in the previous quarter. This is mainly caused by the lower revenue from our schools due to summer holiday, and the lower gain from investments in the financial products sold by banks in Q3 2015.
The fair value change was $25.5 million in Q3 2015. The change in the fair value was due to gain arising from a put option, which was given by Jiangsu Changjiang Electronics Technology Co., Ltd. in connection with the acquisition of STMicroelectronics. Non-controlling interests were $13.7 million of credit to SMIC's attributable profit in Q3 2015 compared to $5 million in the previous quarter. Moving to the balance sheet. At the end of the third quarter 2015, cash and cash equivalents decreased to $741.6 million in Q3 2015 from $766.2 million in Q2 2015. If including other financial assets, we had approximately $1.2 billion cash on hand at the end of Q3 2015 compared to approximately $1.3 billion in Q3 2015.
At the end of Q3 2015, the assets classified as held for sale balance of $111.4 million were living quarter units, which the group has committed to sell to its employee in the future. Our long-term borrowings increased by $23.1 million, and short-term borrowing decreased by $62.2 million 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 $180.2 million of cash from operating activities in Q3 2015, compared to $154.6 million in Q2 2015, mainly because of change in working capital. Cash used in investment activities increased to $187.9 million in Q3 2015 compared to $170.4 million in Q2 2015.
Cash from financing activities changed from an inflow of $379.4 million in Q2 2015 to an outflow of $8.9 million 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 2015, compared to 49.4% and 37.7%, respectively, in Q2 2015. Geographically, revenue from China contributed 47.9% of total revenue. Revenue from North America contributed 33.9% of total revenue, and revenue from Euro-Asia contributed 18.2%. In terms of technology, revenue from 40 nm 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% of total revenue.
In terms of our overall capacity, total monthly capacity at the end of the quarter was 268,800 8-inch equivalent wafers, compared to 255,800 wafers in the previous quarter. The change was mainly because of new 8-inch 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 2015 CapEx for foundry operations are expected to be approximately $1.45 billion. The planned 2015 CapEx for non-foundry operations, mainly for the construction of living quarters, are expected to be approximately $100 million. I now hand the call back to En-Ling for the Q&A session.
Thank you, Gareth. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Thank you. Operator, please assist.
Thank you, sir. Ladies and gentlemen, if you wish to ask the question now, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Okay. Yeah, thank you. Good morning. I wanted to ask on the first question, you have had a very strong performance on 8 inch and the mature 12 inch, filling with a lot of new applications. The 28, I guess, is the one area that has been slow to ramp up through this year. Maybe talk about some of the challenges you have had on 28, and then the opportunities as you go out, maybe starting where you have the initial volume fourth quarter, but how you see that ramp playing out over the next year, say, as a % 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 a 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 will get PO in the second quarter and have a small shipment in the third quarter and increase our shipment in the fourth quarter. 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, therefore, I think the ramp-up is not as strong as could be expected. 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 fourth quarter It is double digit as a % of revenue.
Okay. Great. With the 28, I guess it sounds like it will have a more material ramp. Could you go through again, how we should think about the cost structure side because gross margins are holding up, and I think because you have kept all the existing capacity very full with the new applications. As 28 ramps up, just the impact that we should expect on the margin and on how depreciation loading would increase through next year.
Randy, as you know, we are in the process of ramping up 2 fabs concurrently, the Shenzhen fab and in Q4. The Shenzhen fab actually gone into production in Q3 and our new Beijing fab will go into production in Q4. There will be an increase in our depreciation. We expect in Q4, the depreciation go up by about $15 million. Next year, there will also be a substantial increase on depreciation. Inevitably, there will be some downward pressure on the gross margin. We are still very positive because as we fully ramp up the fabs, we are 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. That is probably the most important part.
Okay. For eight-inch, where you're running full or even at max now, how fast do you plan to ramp the Shenzhen? 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 a standard 0.18 layers. Of course, if there are a change in the product mix that require higher layers count, then certainly it will be at a lower shipment amount. I think the value is going to be there.
Okay. Thanks a lot, good job on the results.
Thank you.
Thank you. Your next question comes from the line of Steven Pelayo from HSBC. Please go ahead.
Can we start with operating expenses? I think last quarter, you guys guided roughly RMB 135-RMB 140, I think the actual was RMB 108 reported. If we exclude a bunch of things, it was RMB 120. I guess even on kind of an apples to apples basis, it was significantly lower. Now when I look at your guidance for fourth quarter, it actually steps up quite a bit as well. 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 generally, if you look at our company in the last few years, Q4 tend to have a high OpEx compared to other quarters. Secondly, we are actually working very hard in terms of R&D teams, in terms of trying to accelerate the R&D activities. That's one reason for that. Also because actually, we're going to have quite a few new tape outs in our new technologies in Q4. There will be some expenses relating to making the masks for the new tape outs. That account for the increase in the OpEx in Q4.
Do you expect any more property disposals or R&D grants in 4Q?
I think our R&D grant guidance for the year remains the same, which is about $40 million-$45 million. We're going to have, as you can see from our balance sheet, we do have a certain living quarter that we have put as asset for sale. That is going to take place over the course of the next one or two quarters.
Okay. Last question to 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 continued ramp-up in our Beijing fab and Shenzhen fab next year, I think the increase in the depreciation would be fairly substantial.
Can you quantify it for us?
I think you should be looking at probably in the range of about 30%-40% increase. Yeah.
Okay. Last question, just quickly for Tzu-Yin Chiu. A lot of 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 % 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 you are referring to the specialty technology that we have just mentioned, I can tell you that our growth size per wafer can increase about 80%. That is a very competitive technology. We look forward to apply this technology across the fab.
Yes, go ahead.
Go ahead. Please.
No, 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 card? Is there some color you can give us on what kind of revenue contribution these are having for you?
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 Leping Huang from Nomura. Please go ahead.
Thank you for taking my question. Two questions. One is, in last few months, we see quite a lot of the cross-border M&A in the China semiconductor industry, including Tsinghua Unigroup's $80 billion investment on the memory factory last week. As the largest semiconductor company in China, I think you did very well in the 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 the inorganic growth, we continue to look for opportunity in this area. We definitely are monitoring the situation. Yes, we are interested. In the last quarters, indeed, we still were successful to buy a significant portion of the fab to get hold of a significant set of secondhand equipment to outfit our sensor fab.
I think just to add on to what T.Y. said, I think we have been fairly active in terms of looking at opportunities in the past 12, 24 months. I think given the strong market, actually, we do not find very attractive targets. Depending on how the industry will pan out in the next few quarters, there could be a downturn in the industry, and that could turn out to be a very good opportunity for us.
You are still focused on the logic foundry business. Because there's discussion whether China should do memory or the DRAM or this. Your key focus is on the logic foundry business. Is my understanding correct or?
That's correct. Our main focus is still on our core business, which is logic foundry.
Okay. The second question is, in September you established a semiconductor equipment leasing company with the National IC Fund. Could you share your plan on how you leverage this? If I understand it correctly, they have a quite large funding source. What's your plan to leverage this leasing company, and what will impact LP? I think this related question is: What's your plan on the 2016 CapEx, including whether you can offload some of the capacity to the leasing company? Yeah, thank you.
Well, first of all, our investment in leasing company, we are just a minority shareholders in the leasing companies. I think if you look at 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 there are very good opportunity there. We think that this leasing company should do well in the future. Specifically for SMIC, I think the leasing company could potentially be an additional source of funding for us as we found appropriate for our funding structure. I think that is the rationale for us to participate in this investment.
Do you have any color for the next year's CapEx now? Yeah.
We are looking at various options, including some of the leasing options to fund our 2016 CapEx. That option needs to be favorable enough for SMIC.
Got it. Okay. Thank you.
Thank you. Your next question comes from the line of Ken Hui 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. 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 the fingerprint sensor is going to be a very important application because more than just hand phones. We continue to invest in these technologies. We don't normally break out in terms of our contribution by certain applications. This is one of the specialized technology that we have been investing R&D in the past, and we are actually seeing pretty strong business from this area. Yeah.
Would you be able to comment? Sorry.
I just wanted to say that as far as the capacity constraint, we are working full speed to make sure that our customers are fully served, but in all areas as well.
I do want to comment that as far as the fingerprint sensor is concerned, actually, we have quite a number of customer engagements.
Would you be able to comment that it 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. 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 conventional logic technology. There are a number of customers, so they cover different portion and the 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.
Hi, good morning, and thanks for taking my question. Dr. Chiu talked about the change in the capacity plans for the Shenzhen fab that you are seeing demand for more layered type of applications. Hello, can you hear me okay?
Yes.
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, it's a pretty material change in the capacity. What kind of applications are driving this change? Also, financially, are you able to get payback in terms of higher ASP by making these wafers with more layers? What's the margin implication as well? Thanks.
Mainly, the number of metal layer has increased significantly, that has impacted the overall wafer out. However, I think that we get the 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, more layers, is the revenue margin better or worse?
I think that the margin is actually equal or better as we look into next year.
What about top line?
I think as what T.Y. said, we should reprice our services. One of the key determinant will be the number of layer. Obviously, highly account, high ASP.
Okay. I understand that your drivers are a little bit different from some of your competitors outside of China. If I talk to the foundries in Taiwan, it seems like many of them have seen rush orders recently, especially for eight-inch wafers, for driver IC, for power management IC, et cetera. I'm wondering if you could just tell us what you've been seeing recently.
I think, as you can see that we have been relatively fully loaded over the last few quarters, in the fourth quarter, we are still seeing a strong loading. We see this fairly consistent loading into the first half of first quarter. 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 Shu from Citigroup. Please ask your question. All right. He has disconnected. We will take the next question from the line of Suji Desilva from Topeka Capital. Please go ahead.
Hi guys. Congratulations on the strong results here. I think you started to answer this question, the 130 nanometer and above products, would you expect that to have seasonal behavior in 2016? 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-inch as we possibly can. We expect, we hope, and we target that the 8-inch capacity will remain fairly heavily loaded throughout 2016.
Yeah, if you look at our target end of the year 2016 8-inch capacity compared to our current 8-inch capacity, I think you're talking about a 20% increase.
Great. That's helpful numbers. 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. Yeah.
Okay, terrific. Thanks, guys.
Thank you. Your next question comes from the line of Sze Ho Ng from BNP. Please go ahead.
Oh, hi. Good morning, gentlemen. Just want to touch on the non-operating side, the change in the fair value change. Is this something tied to JCET share price or it would be based on some formula? Yeah. 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 to acquire STATS ChipPAC.
Actually, we have received a sort of a downside protection from Zhang Xiao Dian in terms of guaranteeing a return for us for this investment.
Actually, the behavior of these options, basically, it extend long derivatives. We need to vary on a quarterly basis. Interestingly, I think this, the behavior of this change in the fair value will work inversely with the performance of STATS ChipPAC. In other words, when STATS ChipPAC's performance gets worse, this option value will increase and vice versa.
Okay. You mean the financial performance of STATS ChipPAC, right?
Yes. Financial performance, yes.
Oh, okay. Got you. Okay, second question, also on the non-op side, the entity, Changjiang Xinke, what is that company's business?
Oh, that is the SPV that was set up for the acquisition of STATS ChipPAC.
Oh, okay. All right. Okay. Got you. Last question. For the utilization, theoretically, what would be the maximum utilization that you can drive from your capacity?
Yeah. 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 Verlyn Xu from Citigroup. Please go ahead.
Hi. Sorry for the technical issue earlier. Yeah. 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%. Why was that? Is mainly from this product change, or is it mainly due to your cost reduction effort? 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. 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. What it means is that we are running at very, very high loading in our fab right now. I think that explains the change in the depreciation. Yeah.
Yeah. I talk about the non-depreciation cost. Yeah. Mainly, I think it is.
Oh, no. Sorry. The non-depreciation cost actually has gone up in Q3 compared to Q2.
Yeah, for the total, I think that actually it probably was at a smaller magnitude compared to the wafer shipment increase. Is that mainly due to, you have the more product mix on the 0.18/0.25 wafers, or is this due to, you have this continuous cost reduction efforts on your fab?
Our increase in shipment is 5.4%.
Yeah.
Our increase in other manufacturing cost within the cost of goods sold is 6.9%. Actually, I think it's very much in line. Yeah.
Okay. Yeah. Thank you very much for clarifying that. Next question is, for the recent M&A in China, do you see any order flows change according to this M&A? Also going forward, how are you expecting the order flows change because of this M&A activities in China? Thank you.
I'm sorry, can you repeat your question again?
Yeah. I think, for recently, we have at least a lot of the industry consolidation happening in China. Do you see any order flow change because of this industry consolidation? Going forward, are you expecting any order flow change because of this consolidation in the industry?
Well, first of all, I think, we do see some consolidation in the industry globally for the semiconductor industry. Okay.
Yes.
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&A among our customers. Yeah.
Okay. You do expect going forward, you probably will try to penetrate into this new M&A business for your business, right?
Yeah, definitely. As a matter of fact, it may not specifically relating to the M&A, but actually a lot of the global customers see the value to have the production in China because right now, the China IC supply chain is a lot more robust now than a few years ago.
Yeah. Understood. Yeah. I think last question is, most of your peers, foundry peers, they are seeing 4Q revenue to decline, quote-unquote, however your guiding still growing 4Q. Where does this strength come from? Thank you.
I think this strength come from both very strong loading in 8-inch as well as our 12-inch fabs. As a matter of fact, indeed some of our customers have been impacted by inventory adjustment issues. Because of 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. That is the basic reason why we have continued to perform above our industry peer.
Thank you. You said some of your customers have been impacted by this inventory correction. Can you give us more colors what kind of these customers are? Thank you.
Let me give you an example. We have 10 customers, those were 10 new customers. These 10 customers give us a revenue of $90 million in 2012. These 10 customers, in 2015, is forecasted to give us a revenue up to $700 million or above. 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.
Thank you.
These customers come from all regions of the world.
From all of the segments. Is this mainly for communication or for consumer, or this is across the board?
Across segments.
Okay, thank you. How about these 10 customers' business projection next year?
I think we continue to believe that they will be performing very well.
Okay. Thank you very much. Thank you.
Thank you. Your last question comes from the line of Rick Hsu from Daiwa Securities. Please go ahead.
Yeah. Hi, good morning, guys. Yeah, congratulations to your strong results. Just one more question on your Q3 non-controlling interest. I think roughly about RMB 13 million, I think, can you explain this item a little bit more? Because I think I kind of missed out your explanation earlier. Also, elaborate the guidance, RMB 33 million-RMB 36 million non-controlling interest in Q4. Would that be addition to your total bottom line or something?
The non-controlling interest is relating to some of the joint venture debt has been set up by SMIC because we don't wholly own the subsidiary. If the joint venture is incurring losses, some of the losses will be attributable to the non-controlling interest. That would be adding back to our net income. I think that's why you see that actually, the number has been positive. For the Q4, the increase is because, the same as end of last year, we do have an arrangement that we will share some of the R&D expenses with our B2 fabs. That is a portion that would be attributable to the B2 other shareholders.
I think my real question is, going forward, how are we going to model this item, say in 2016 or 2017?
Well, actually, no, the way you model it, you should look at the profitability of this joint venture. Okay. Understand, there are some difficulties with how the analyst could model it, especially in the beginning phase of this joint venture operations. We are taking the step to give the guidance on this item on a quarterly basis. Yeah.
I see. All right. Thank you so much.
Thank you. I would now like to hand the call back to CEO, Dr. Chiu, for closing remarks.
In closing, I would like to thank everyone who participated in today's call. 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 third quarter earnings conference call. We thank you for joining us today. Goodbye