Welcome to the Semiconductor Manufacturing International Corporation's Second Quarter 2015 Webcast Conference Call. Today's conference call is hosted by Doctor. T. Y. Chu, Chief Executive Officer Doctor.
Yonggang Gao, Chief Financial Officer Mr. Gareth Kung, Executive Vice President of Strategic Business Development, Finance and Company Secretary and Mr. Anling Feng, Vice President of Investor Relations. Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's website. Please be advised that your dial ins are in listen only mode.
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.
Enlaying Feng, Vice President of Investor Relations for the cautionary statement.
Good morning and good evening. Welcome to SMIC's Q2 2015 Earnings Webcast Conference Call. For today's call, our CEO, Doctor. T. Y.
Chu, 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 Company Secretary, Mr. Garrett Kang, 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 the quarterly financial press download at www.smics.com under Investor Relations in the Events and Presentations section. Before I turn the call over to Doctor. TY 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 risks and uncertainties. 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 the 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 will make reference to financial measures that do not conform to Generally Accepted Accounting Principles, GAAP. These measures may be calculated differently than similar non GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non GAAP numbers we will be discussing. Please note that all currency figures are in 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, Erning. Greetings to everyone. Thank you all for joining us for this quarter's call. Today, I'm pleased to share with you SMIC's 2nd quarter achievements, updates and outlook. Despite the reported inventory adjustment in the industry, SMIC has achieved 2 quarters of consecutive growth in 2015 and we are guiding an additional quarter of growth for the Q3.
SMIC has successfully ramped up new customer products and new technologies to keep our fabs well utilized. The Q2 of 2015 was an excellent quarter. We had record high revenue of 5 RMB546,600,000 as well as a record gross margin of 32.3%. Both shipments and utilization exceeded our expectations, resulting in 7.2 percent quarter over quarter revenue growth. We also achieved a record high profit attributable to SMIC in 2ndq 2015.
If a gain in 2Q 2010 from commitments to grants, shares and warrants is excluded. We believe that this excellent performance compared to industry caution was largely a result of the careful execution of our strategy, which includes the diversification of products, technologies and a close partnership with customers. I would like to reiterate the importance of our strategy, which is to differentiate and diversify our product mix to grow our company in a profitable manner. Our technologies to meet customers' unique applications. To address our technology progress, 28 nanometer is in initial risk production.
Our 1st batch performed well achieving recognition from Qualcomm and mobile phone manufacturers. This marks a new era of 28 nanometer advanced mobile phone chips manufacturing in China. We target to start 28 nanometer revenue contribution in Q4 this year. Our target for high chain metal gate is still the same, 2 to 3 quarters after polysilon successfully ramps. In terms of 8 inches differentiated technologies, the demand remains strong.
We have engaged with new and existing customers over the past few years on a number of new products and anticipate revenue growth from this year and going forward. 27% of our revenue in the first half of 2015 is contributed by new products launched in the last year. With the diversification of our product offerings and technology mix, we have seen a non handset related wafer revenue contribution increasing from 48% in Q1 2014 to 63% in Q2 20 15. Looking at our 12 inches capacity utilization also strong with 65 and 40 nanometer running products with diversified applications. To address the strong utilization, we continue to improve operating efficiencies and adding capacity in order to grow our business.
As mentioned last quarter, Shenzhen become operating in the 2nd quarter of back end bottleneck metallization, helping to boost Shanghai and Tianjin's 8 inches output. We will begin full line or full flow operations in Shenzhen this quarter. By the end of this year, we target to have about 20,000 wafer per month installed capacity in Shenzhen. As a result of operational efficiency improvement, as well as new equipment installation. Our Shanghai 8 inches fab increased 2 ks per month in capacity and our Beijing 12 inches fab increased 1 ks per month in Q2 compared to the previous quarter.
Our 12 inches fab in Shanghai maintained a 14,000 wafer per month capacity, mainly for 4045 nanometer as well as R and D and an amount of 14,000 per month capacity, 6,000 per month is capable of 28 nanometer production. In August last year, we formed a bumping joint venture with JSAK. Equipment has been moving in and we have begun a qualification for our customers' product and technology. The qualification is going smoothly and depending on the customer need, production is targeted to commence in 2016. At the end of June, also announced the formation of a new R and D company jointly invested in by SMIC and our partners.
The R and D company will first focus on developing 14 nanometer infat logic technology and will be China's most advanced IC development and R and D platform. We are very excited to be working with industry leaders to develop leading edge technology and shorten time to markets. Our China revenue share has continued to increase in the past quarters. And in Q2 China region revenue contributed more than half of our revenue for the first time. Not only are we gaining some market share from our China customers, we are also witnessing and helping some of our domestic and global customers gaining IC market share in China.
China continued to be the largest consumer of IC globally and the largest manufacturing base for electronics. In the Q2, China publicized its Made in China 2015 initiative, which aims to upgrade the manufacturing industry, while prioritizing 10 secondtors, one of which is the integrated circuit. With last year's publication of National IC Promotion Online and the Meiding China 2015 initiative, it is clear that SMIC is in a key position as the largest and the most advanced foundry in China to capture the many opportunities stemming from China. In conclusion, we have achieved a strong first half with high utilization and are expecting growth again in the Q3. Our good performance has been a result of SMIC's careful execution of our strategy, which includes diversification product and technologies.
We are cautious about the second half given the industry's inventory situation. However, we are optimistic about our future given our position in China and our strategy. We stay committed to maintaining sustainable profitability and building value for all stakeholders. Financial highlights and the 2015 Q3 guidance.
Okay. Thank you, Stephen. Greetings to all our listeners. I will now highlight our Q2 2,050 results and our 3rd quarter guidance. Our revenue was a record high of 546,600,000 dollars in 2Q 'fifteen, an increase of 7.2% quarter over quarter, an increase of 6.9% year over year.
Gross margin was 32.3% in 2Q 'fifteen, a record high, compared to 29.4% in 1Q 'fifteen and 28% in 2Q 'fourteen. Profits for the period attributable to SMIC was $76,700,000 in 2Q 'fifteen compared to $55,500,000 in 1Q 'fifteen and $56,800,000 in 2Q 'fourteen. Excluding the gain from gain off commitments to great shares and warrants in 2Q 2Q 'ten. Profit for the period attributable to SMIC was record high in 2Q 'fifteen. And China region revenue grew to record high of 51.1 percent of overall revenue in 2Q 'fifteen.
Now looking ahead into the Q3 of 2015, Our revenue is expected to increase by 1% to 3% quarter over quarter. Gross margin is expected to range from 28% to 30%. Non GAAP operating expenses, excluding the effect of employee bonus growth, government funding and gain from disposal of linked quarters are kept to range from RMB134 to RMB139 1,000,000 and non controlling interest of our majority owned subsidiaries are expected to range from positive $11,000,000 to positive $30,000,000 which are losses to be borne by non controlling interest. I will now hand the call over to Garrett for more details, financial commentary.
Thank you, Gautam. Thank you everyone for joining us today. I will now comment on the details of our last quarter financial results. On the income statement, revenue increased to RMB546.6 600,000 in Q2 2015, up 7.2% Q on Q from RMB509.8 million in the Q1 2015 mainly because of increase of wafer shipments in Q2 of 2015. Cost of sales increased to $370,200,000 in Q2 2015, up 2.9% Q on Q mainly because of the increase in other manufacturing costs in Q2 2015.
Gross margin increased to 32.3% in Q2 2015, up from 29.4% in the previous quarter. The change was mainly due to an increase in the fab utilization the quarter. Operating expenses in Q2 2015 were 115,700,000 an increase of 10.8 percent Q on Q from RMB104.4 million in Q1 of 2015. R and D expenses increased to $55,200,000 in Q2 of 2015 from RMB53.5 million in Q1 of 2015. Excluding the funding of R and D contract from the government, R and D expenses increased by RMB6.8 million Q on Q to RMB65.6 million in Q2 2015.
Funding of R and D contracts from government was $10,400,000 in Q2 2015 compared to $5,300,000 in Q1 2015. General and administrative expenses increased to 52,100,000 in Q2 2015, up 22.5 percent from Q on Q from RMB42.5 million in Q1 2015 mainly because of first of all start up expenses relating to 2 new fab projects and accrued employee bonus in Q2 of 2015. Excluding the effect of employee bonus accrual, government R and D funding and gain from the disposal of living quarters. Non GAAP operating expenses were 110.9 $1,000,000 in Q2 2015 compared to $99,700,000 in Q1 2015. Profit from operations in Q2, 2015 was 60,700,000 dollars compared to $45,500,000 in Q1 2015.
Other income was $11,900,000 in Q2 2015 compared to $6,100,000 in Q1 2015. Finance cost decreased to RMB2.4 million in Q2 2015 compared to RMB5 1,000,000 in the previous quarter. The change was mainly due to the group have replaced some of the bank borrowings in Q1 2015 and 2, more interest expenses were capitalized as part of the cost assets under construction in Q2 of 2015. Foreign exchange gains increased to $5,000,000 in Q2 of 2015 compared to RMB120 1,000 in the previous quarter, mainly due to an appreciation of RMB against U. S.
Dollar in Q2 of 2015. Non controlling interest were RMB5 1,000,000 of credit to SMIC attributable profit in Q2 of 2015 compared to RMB3.9 million in the previous quarter. Moving to the balance sheet. At the end of the Q2 of 2015, cash and cash equivalents increased to $766,200,000 in Q2 of 2015 from $402,400,000 in Q1 of 2015 mainly because of the closing of the private placement to China Integrated Circuit Industry Investment Fund in Q2 of 2015. If we include other financial assets, we had approximately RMB1.3 1,000,000,000 cash on hand at the end of Q2 2015 compared to approximately 1,000,000,000 in Q1 of 2015.
Our long term borrowing increased by 46,600,000 and short term borrowing decreased by 73,000,000 compared to the previous quarter. At the end of Q2 2015, our total debt to equity ratio was 28.2% compared to 32.9% in the previous quarter. In terms of cash flow, we generated RMB154,600,000 cash from operating activities in Q2 of 2015 compared to $134,300,000 in the previous quarter, mainly because of the increase of profit for the period. Cash used in investing activities increased to RMB170.4 million in Q2 2015 compared to RMB148.9 million in the previous quarter. Cash from financing activities changed from an inflow of RMB185.8 million in Q1 2015 to an inflow of 379,400,000 in Q2 2015 mainly because of the closing of the private placement to China Integrated Circuit Industry Investment Fund in Q2 of 2015.
To examine our revenue by 37.7% of our revenue respectively in Q2 of 2015 compared to 44.2% and 46.3% respectively in Q1 of 2015. Geographically, revenue from China contributed 51.1 percent of total revenue. Revenue from North America contributed 32% of total revenue and revenue from EuroAsia contributed 16.9%. In terms of technology, revenue from 4540 nanometers contributed 15.3%. Revenue from 6555 nanometers and 90 nanometers contributed 25.2% and 4.8% respectively.
Meanwhile, 0.13 micron and above line width contributed 54.7 percent of total revenue. In terms of overall capacity, total monthly capacity at the end of the second quarter was 255,800 8 inches Equivalent Wafers compared to 251,500 Wafers in the previous quarter. The change was primarily due to the increase of fab utilization in Q2 2015 compared to 99.7% in Q1 of 2015. We reiterate our planned 2015 CapEx for foundry operation to be approximately RMB1.5 billion. The planned RMB2.15 CapEx for non foundry operation mainly for the construction of living quarters approximately RMB150 1,000,000.
The group plans to rent out or sell this specific quarter units to employees in the future. I'll now hand the call back to Ernie for the Q and A section.
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.
Ladies and gentlemen, we will now begin the question and answer Our first question comes from Liping Huang of Nomura. Please ask your question.
Okay. Thank you for taking my questions. So congratulations for your very strong second quarter result. So my first question is about your second quarter result. We see that most of your competitors suffer from the smartphone inventory correction in Q2, but if you have a restaurant 7% revenue growth.
So I noticed that your system customer or also your customer from Eurasia, we invest strong this quarter. So can you share any color how you achieved this strong result? And is it possible to share any revenue mix by the customer and I think you mentioned 63% from non smartphone. So what exactly the customer mix the end product mix as in these investor worry about the future further smartphone inventory correction? This is my first question.
And the second question is about your 20 nanometer process ramp up. So congratulation for your the successful commercialization of the 20 nanometer process. So but we see that your major customer Qualcomm has facing some inventory correction now. So what will be the Qualcomm's weakness on the 28 nanometer will affect your the ramp up on the 28 nanometer process in the coming quarters? And do you have any B plan or the other customer which can offset the Qualcomm's weakness?
Thank you. These are two questions.
Yes. Thank you, Li Bin, for the questions. I will address your first question about our performance in Q2 and in T while we address the question started from second half of last year, we've been quite actively trying to diversify both our customer base and also our product and technologies. So as mentioned in TY script, actually our non handset revenue have been increasing steadily since the Q1 of 2014. So some of the new applications that we have achieved success including for example smart cards, including some of the non handset communication application for example connectivity, set of boxes and others.
And that have been a very good strategy for us in terms of diversifying our revenue base. And as you know, we have been introducing number of new technology into production this year, including the BSI technology for CIS and also for some of the MEMS applications. So we are I think we are in a pretty good position right now in terms of our overall diversification of our custom base and also for our applications. The other thing is that even though you may see the overall smartphone growth have sort of slowed down but it also depends on which customers you are supporting as well. And I think so happens that in our case here some of our customers are doing quite well in the smartphone space despite the overall slowdown in the market growth.
So I think that also explained the outperformance for us.
This is T. Y. I also want to add a number of comments that to say that despite the fact that smartphone is going through some slowdown, what we see that some of our customers, they are increasing in terms of their market share in this smartphone area. So still it's a huge, huge market. And so when they increase their market share, I think that's really translate to a very large volume for us.
Secondly, I'd like to talk about the 28. I think that certainly our partner the largest partner is a significant customer for us in 'twenty eight. But we also are looking forward to other applications and we have at least 4 different customers approaching us using our 28 and going through new tape out. So I think our 'twenty eight volume is still small, and from a small basis, we can still maintain a reasonable growth in 'twenty 8.
Your next question comes from the line of Mr. Randy Abrams of Credit Suisse. Please ask your question.
Okay. Thank you. I want to expand on the last question on the business environment. If you could talk looking forward now for Q3, the applications you see holding up to drive your 3rd quarter to continue to grow? And could you give a comment on recent tone of business just over past months given a lot of the mix reporting if you've seen how the overall order environment, whether you've seen any pull in or cancellations and how it could imply for Q4 continue to hold up?
We are seeing the Q3 as given our guidance, we are still guiding growth in Q3. And I think that the strength that we have seen in Q2 will continue in Q3, mainly as I mentioned applications such as smart cards, set up boxes and others. And then and also T Y has mentioned that some of the smartphone customer that we are working with, they continue to receive very strong demand in the markets. So that also translate into more order for us. So right now, we cannot come in on Q4 because obviously the market is very dynamic.
But overall, I think we are cautiously optimistic.
Okay, great. And I want to follow-up also on 20 28. Could you talk about now impact as some of those costs are getting held in OpEx ahead of the ramp? So the outlook if 20 28 say turns on in 4th quarter with the impact on OpEx and cost of goods sold or gross margin as those costs come on? And then if you can provide an update on the Beijing fab, are you still planning that fully for 28 or you could also do some of these 40 or 55 nanometer applications in that fab?
Okay. Let me comment on the 28, specifically the Beijing fab, indeed in Beijing fab, we are even from the very beginning to target a transfer of 40 nanotechnology as well as 28. And right now, I think both are getting significant interest from the customers. And so we see that Beijing fab is doing pretty well. This year, however, we have like Gareth has mentioned, our overall CapEx will remain the same.
The foundry related CapEx is RMB1.5 billion. However, our B2 will be holding our B2 investment to 6,000 wafer per month. And because of the very, very high customer demand, we are planning to expand our fab 8 to about 16,000 to 18,000 from the 14,000 per month case. So there is a because of Fab 8's expansion will generate a much faster capacities to meet our very tight customer demand. So in that case, our overall investment CapEx will remain the same.
Okay. And then could you comment on the OpEx and margin implication? I guess, when the Beijing fab comes online, if we should factor more depreciation or a shift of cost from OpEx to gross margin?
Yes. Our commercial production in Q3 and our Beijing fab 2
will go
into commercial production in Q4. So that will impact somewhat our gross margin. In terms of OpEx, we you're going to see the peak of the OpEx in Q3 and it will come down significantly in Q4 because some of the expenses that was captured in OpEx will move to the cost of goods sold line. So we will look at the OpEx back to about 20% level excluding the R and D funding and also excluding the spot bonus accrual.
Okay. My final question just on the FinFET. You had a recent announcement that I think talked about the government objective to have FinFET by 2020. But curious your timetable, just the plans for that R and D venture and when you could bring FinFET into commercial production? Thank you.
Could you repeat the question again? Yes. I think when you announced the
R and D project for FinFET, there was a more like a national objective to have FinFET production by 2020, which was in that original release. But I'm curious when you're looking at your timeline, if you think you could pull that in, when your target to have the first customers ramp up for FinFET or potentially the risk production on that? I
think that we believe that it is maybe possible to pull in somewhat, but definitely we have a goal to be able to go into production by this day 2020.
Okay. All right. Thank you.
Your next question comes from Steven Vallejo of HSBC. Please ask your question.
Okay. I'm sensing you probably don't want to answer, but is there any way you can quantify a little bit more specifically your 28 nanometer contributions and kind of ramp over the next few quarters or so? And also maybe you could then quantify what you were just suggesting on the shift from OpEx to COGS. If we just assume in the Q4, let's just say everything was flat revenues, but you had this shift, how much basis point impact to gross margins would we see? That's kind of my first question.
Yes, Steve. Right now our plan is going to start mass production for Tunae in Q3 and we're going to see revenue contribution in Q4. But right now I think it's a little bit difficult for us to quantify because even though right now our products have been quantified, but also depending on the end market demands for our customers. So we don't have a clear visibility at this point in time. In terms of the gross margin impact from the fab lab, both Santen fab and the B2 fab group into production in the second half of the year, We have already given our Q3 guidance on the gross margin which is ranging from 28% to 30%.
And then for Q4, right now, as I said, the market is very dynamic, also very much depend on the fab utilization overall. So we would not want to comment on the gross margin in Q3. We don't want to comment on the gross margin for Q4 at this point in time.
Okay. Well, just a quick follow-up then. I mean, if you think about it, the wafers that you're going to be starting here in the next few weeks or so is ultimately your Q4 revenues. Do you want to just kind of give any general qualitative thoughts on 4th quarter at this point?
Yes. Right now, we are seeing the strength that we have seen in Q2 carry to Q4 the strength that we have seen in Q2 carry to Q3. And so far for Q4, the indication have been still quite strong. But as I say, right now it's too early for us to commit on any revenue numbers.
Okay. Last question, more of a longer term one. 13 strategy has been sustainable profitability for that time period and you've clearly delivered on that. Any new targets that we can talk about, ROE targets, cash flow targets? Is there some other metric we can focus on besides a vague above breakeven target?
Yes. I think our target has remained the same. I mean we still have this ROE target of trying to achieve 10%. But I will also say that we are going to start 2 new fabs Shenzhen and in B2 in the next few months. As you can appreciate, as you start 2 new fabs, there will be some cost that will impact our gross margin.
So, but we are still working very hard in terms of securing more customers and also introducing more technologies to keep our fab fully loaded.
Okay, fair enough. Thank you.
The next question comes from Ken Hui of Jefferies. Please ask your question.
Thank you for taking my question. First on your 3Q gross margin guidance, I guess you hint that part of the decline relative to 2Q is due to the Shenzhen set. If this is true and if we exclude the impact from Shenzhen set, what would be your expectation for 3Q gross margin? That is my first question.
Yes. Right now our forecast is based on the fact that our Shenzhen fab will go into commercial production in September and the impact based on our estimation is about 1%.
So if that is the case then if we exclude the impact then the 3Q gross margin could be actually very close to 2Q and can we take it as actually really a strong indicator going into seasonal slow 4Q?
As I said right now we do see that the order book for Q3 for us is still relatively strong. But as I say, the market is very dynamic. So I think we still have to wait and see what's going to pan out for Q4.
Okay. And then my follow-up is regarding your customer mix. I think it was mentioned earlier that we saw a big jump in terms of your revenue coming from system and other customers. Is the contribution mainly from the single largest system customer or it is actually a combination of a diversified group of customers?
I think that right now we are gradually seeing that there are a number of system customers that's starting to utilize SMIC's service. And so it is a diversifying system customers.
And they include Chinese and non Chinese, right?
Yes, that's true. Both Chinese as well as global system customers.
The next question comes from Daniel Hayler from Bank of America Merrill Lynch. Please ask your question.
Hi. Thanks for taking my question. Congratulations on the sustained growth on your new product strategy, TY. I wanted to ask, it looks as though you had mentioned some key new product areas, smart cards and set top boxes with good visibility into the Q3. Some of your caution relating to the Q4 relating to sustainability of that?
Or is it more of the rest of the business, the core business that's shaky because of the high inventories? I just wanted to get a feeling for the visibility in both of those areas, both new products and core business as you look out to your order book for Q4 right now?
Okay. As Gareth said, our recent weeks, still we are seeing the order books remaining relatively stable into the 4th quarter. However, we do see the industries in general, everyone our industry peers reporting a very cautionary view. And we are also seeing some macroeconomic shifts, for example, that some of the foreign exchange fluctuations that may be affecting the overall IT market. So we need to have sometimes to see a stabilization of these factors.
So although we remain cautiously optimistic, we still think that, yeah, the visibility in the Q4 is not good enough to give a very firm comment.
So yes, so it sounds like you have good very good visibility on new products, so you're just not sure about the rest of the business because of the macro situation. Is that right?
That's correct. Yes.
Okay, great. Thank you. And then I'm looking at the R and D credits in the Q2 and the property gains, it looks like and then some ForEx gains. It looks like kind of a net benefit relative to your Q1 from these to be almost $20,000,000 net benefit, which is about which your profit increased by. So I'm wondering why the but your revenue was up about $35,000,000 So I'm trying to understand why the non excluding these non credit items, why the profits aren't going up as much?
And perhaps maybe talk about the 3rd quarter dynamics there where you have R and D credits and property maybe playing out again in the Q3 guidance as well?
Dan, I'm not quite sure about your question here. Can you repeat it?
Yes. So, as you mentioned in your statements, the FX gain, I think you said was up about 5,000,000 dollars from the previous quarter. And then the non if you exclude the disposal gain look like it was about a $5,000,000 was it a $10,000,000 gain there? And then also your bonus, the R and D funding went up about I think $5,000,000 did you say? So you had a 5,000,000 dollars So if you add those 3, that's 15,000,000 right there of operating gain.
Is that right?
Not quite right actually. We did not record any disposal gain in Q2. Our foreign exchange have gained about RMB5 1,000,000 and then our R and D funding increased about RMB5 1,000,000. But our net income actually increased about RMB20 1,000,000.
Okay. So the one offs were more like RMB10 1,000,000 is that right, the one off gains?
If you look at it this way, yes.
Okay, got it. Okay. And then as you look into the I know these are tough to predict, but should we continue to model maybe some credits going forward into the Q3 both
the R and
D credits plus the disposal?
We I think the lot we mentioned that for our full year R and D government funding is about $45,000,000 to $50,000,000 I think this is still on target for us. And then we may be booking some disposal gain in the second half this year from selling some of the living quarter unit to our employees. $1,000,000
looks pretty much back end loaded. $500,000 looks pretty much back end loaded. So I think you did only $360,000,000 So how much is left do you expect to actually spend on a cash flow basis for second half CapEx? RMB1.5 billion is the budget. And I'm wondering from a cash flow perspective, how much do you think you'll spend in the second half of the year?
Thanks.
Dan, I think I need to get back to
you in terms of when
you just asked me about the CapEx on
a cash flow basis. Maybe we can talk about it separately.
Okay. But remaining on the budget is was it about a $1,000,000,000 that's left for the second half or what's the remaining balance on the budget? I think you said on the yes, you spent $370,000,000 What was the first quarter spend?
The spending in the first two quarters is already about RMB500 1,000,000.
How much?
So you're right, about RMB500 1,000,000 on the foundry CapEx so far. So you're right the rest of it will be spent in the second half of the year.
Your next question comes from Gokul Hariharan of JPMorgan. Please ask your question.
Yes. Hi. Congrats on the great gross margin performance. A couple of questions. First of all, a more bookkeeping question on the depreciation side.
I think I remember last time you guided for depreciation this year to grow about 3%. But when I look at the run rate so far, I think it looks much lower than the run rate seems to be much lower than last year. Could we have an update on what we expect for full year depreciation this year as well as what kind of a step up should we expect on the depreciation side once Beijing fab and the Shenzhen fab come online? That's my first question.
Yes. Okay. We are now seeing there will be about $7,000,000 increase in depreciation in Q3 and another about $20,000,000 increase in Q4. Overall for the year, the depreciation will be about will be in the range of 535 to 540. So which is year on year is a little bit lower than last year.
So that is right now our depreciation forecast.
Okay. And should we be expecting that to continue to increase in first half next year given like you answered to Dan's question a lot of the CapEx is coming in second half of this year. Is that a fair expectation?
Yes. I think we should see some increase in depreciation next year.
Okay, great. The second, a bit more of a longer term question.
I think
you guys have mentioned some products on the memory side and there's been a lot of talk about China getting involved in memory, especially on the NAND flash side. Is memory something that SMIC would be involved in at some point, participate in China's memory ambitions? And what would be the nature of the involvement? Is it going to be kind of a partnership? Or you're going to be taking a stake in companies like XMC or something like that?
Can you talk a little bit about what your plans are on the memory side?
Yes. In the memory side, we have in the past 10 years always had a memory effort. And at this moment, SMIC has a specialty NAND and NOR technology to serve smartphone code storage applications. This is our main targeted market area. And this is we remain focused in the logic applications.
At this moment. Indeed, if there are other discussions into going into memory in the large scale, SMIC is not actively considering it. Okay. Thank you very much. Thanks.
Your next question comes from Suji Desilva Desilva of Topeka. Please ask your question.
Hi, congratulations on the strong results here. With the utilization so strong, I'm wondering, were there any customers you had to put on allocations or any delinquencies in the second quarter that are flowing through to help you with 3rd quarter visibility?
Yes, they are.
Okay, great. And my other question was what's the utilization implied in the Q3 gross margin guidance aside from the fabs coming online? Thank you.
Right now, we are still our guidance is based on very high 90s utilizations.
Okay. And maybe one last question. With China growing so much as a percent of revenues, is China going to get to be an even bigger part of the revenues a year or 2 out here? Or is there an effort to offset that with non China customers to diversify? Would China get to be 60%, 70% of the revenues the way things might track in a few years?
Just curious on your thoughts there. Thank you.
I think that for SMIC, we have the full intent to be a global technology service company. And so it is not intent to our intent to pay attention only to China market. And so when we ramp up our 28, I think there will be a gaining market both in Japan as well as in Europe. So, indeed, there is a steady increase in the China revenue as a percentage, but we have not relaxed in our effort in other area and continue to work diligently Europe, Japan.
Your next question comes from Shiho Ng of BNP. Please ask your question.
Hi, good morning gentlemen. Congratulations on a strong quarter. Is it fair to say that our company is a net beneficiary from Remedy appreciation? And will be helpful to get some soft sensitivity analysis? And I have a follow-up.
Yes, we recognize there was a one off depreciation in RMB yesterday. And given the fact that actually we do have substantial cost which are denominated in and most of our revenues are in U. S. Dollar. So I think this is going to be positive for us.
I see. All right. Any sensitivity analysis you can share or is it complicated?
I'm sorry. I think the impact would not be very big because right now about maybe 20% of our cost 20% to 30% of our cost are in RMB. Okay.
All right. I see. And then second question regarding the bumping JV. Is it more like to handle the captive demand or they are free to approach outside customers?
Yes. That JV is fully actually capable of receiving outside customers, although we hope that a significant amount of the capacity will serve SMIC's own customers.
Okay. All right. Okay. Thank you very much.
Your next question comes from Rick Please ask your question.
Yes. Hi. Good morning, guys. And thank you so much for taking my questions. Question on the 28 nanometer ramp up.
I think initially you guys talked about the start to ramp up in Q4, but I think initially this node should be kind of margin dilutive. So how do you guys expect this 28,000,000 to ramp up to reach your corporate average margins? How many quarters do you guys decide to take?
I think it also depends on the market demand as well. You're right that as we start initial production for 'twenty eight will be margin dilutive. But we think that as we are able to ramp into economic scale, for example, in about 20 ks to 25 ks, the margin should be get close to our corporate average.
Okay. Yes, that's very clear. Thank you so much. And just another follow-up to this 28 nanometer question. Apart from this big customer Qualcomm, can you share with us your view that how many more new customers you guys working with for 28 and I mean the ramp up especially for maybe for next year?
So and in what applications in terms of product applications, how many more customers you guys are working with in what kind of applications? Are you guys have so far for 28 nanometer?
Okay.
Yes, indeed, we have 4 or 5 customers right now already working with us. And at this moment, the application spends from the TV set of box and a lot of besides the smartphones, a lot of other consumer applications. So, we are seeing a significant diverse applications in our 28 technology. Let me calculate. At least right now, we have about 6 NTOs that is running or will be running within the Q3.
And also tape outs, how many tape outs do you guys have so far?
I mean the 6 NTOs, 6 new tape off.
Yes, yes. All right. Thank you. Thank you so much.
That will be our last question at this time. I would now like to hand the call back to our CEO, Doctor. Qiu for the closing remarks.
In closing, I would like to thank everyone who participated in today's call and again thank all of you, our shareholders, customers, employees and suppliers for their trust and their support. See you next time.
This is the end of SMIC's 2nd quarter earnings conference call. We thank you for joining us today.