Welcome to the Semiconductor Manufacturing International Corporation's fourth quarter 2013 webcast conference call. Today's conference call is chaired by Dr. T.Y. Chiu, Chief Executive Officer, Dr. Yonggang Gao, Chief Financial Officer, Mr. Gareth Kung, Executive Vice President of Finance and Company Secretary, and Mr. En-Ling Feng, Senior Director 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. However, at the conclusion of the management presentation, we will be having a question and answer session, upon which you will receive further instructions as to how to participate. The earning press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event at www.smics.com.
Without further ado, I would like to introduce you to Mr. En-Ling Feng, Senior Director of Investor Relations, for the cautionary statement.
Hello, everyone. Welcome to SMIC's fourth quarter 2013 earnings forecast conference call. For today's call, we will introduce our new CFO, Dr. Gao Yonggang. Then our CEO, Dr. T.Y. Chiu, will provide some general remarks. Afterwards, our Executive VP of Finance and Company Secretary, Mr. Gareth Kung, will present the financial commentary. This will then be followed by our question and answer session. As usual, our call will be approximately 60 minutes in length. The earnings press release and the quarterly financial presentation are available for you to download at www.smics.com under Investor Relations in the Events and Presentations section. Before I turn the call over to Dr. T.Y. Chiu, let me remind you that the presentation we will be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but represent the company's estimates and are subject to 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 risk and uncertainties that could impact our future operating results and financial condition, please see our Form 20-F filed with the United States Securities and Exchange Commission on April 15, 2013. During the call, all references made to 2013 annual figures are based on an unaudited basis using the summation of the reported quarterly results. Also, during the call, we will make reference to financial measures that do not conform to Generally Accepted Accounting Principles, GAAP. This information may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the tables in our press release for a consolidation of GAAP to the non-GAAP numbers we will be discussing.
I will now turn the call over to our CEO, Dr. T.Y. Chiu, for the opening remarks.
Thank you, En-Ling. Greetings to everyone. We wish you and your loved ones health, happiness, and peace in the Year of the Horse . Thank you for joining our fourth quarter 2013 earnings webcast. First, I would like to take a moment to introduce our newly appointed CFO, Dr. Yonggang Gao. Dr. Gao received his doctorate degree in management from Nankai University. We are very pleased to have him with us this morning on the call. He has been a director on SMIC's board since 2009 and is intimately familiar with this enterprise. He had previously acted as Executive VP of Strategic Planning for the company. He has more than 20 years of financial management and administrative experience in China, and is well-respected in the Chinese accounting professional circles and is a standing committee member of the Accounting Society of China.
He has a strong working relation to the domestic banking and the government institutions. In the meantime, we would like to thank Mr. Gareth Kung for his great contribution to imposing financial discipline in SMIC and in helping to return this company to a sound financial footing. He will remain as the Executive VP of Finance, reporting to Dr. Gao, as well as serving as the board's secretary. We believe that a combination of these two gentlemen with complementary experiences and extremely strong financial capacity will further strengthen SMIC's finance accounting team and will make this one of the finest teams in the foundry industry. This augmented team will help to expedite this phase of SMIC's rapid growth and ensure our objective of sustained profitability. Gareth will be reporting our fourth quarter financial results this time. Yonggang, would you like to say a few words?
Okay. Thank you, T.Y., for the introduction. Good morning and good evening. It's an honor to take on this new role at SMIC. I am happy to join the call today with you all, and I look forward to meet you in the near future. T.Y., back to you.
Thank you, Yonggang. I would like to begin today's remark by highlighting our 2013 achievements. 2013 was another record-breaking year for SMIC. Based on our unaudited financial statements for the full year of 2013, revenue in 2013 reached a record high of $2.07 billion, an annual growth of 21.6% when compared to 2012. If we remove the Wuhan revenue contribution, SMIC's revenue growth was a robust 28%. Our net profit attributable to the owner of the company also reached a historical high of $173 million, compared to $22.8 million in 2012, an increase of 6.6 times. Our robust revenue and profit growth is based upon a modest monthly capacity build-up of 6.7% year-over-year. Meanwhile, our productivity reached an all-time high in terms of revenue per employee, growing 16% in 2013 compared to 2012. Our asset turnover ratio improved 10.3% in 2013 compared to 2012.
In 2013, we enhanced our financial position. Cash from operation increased 69.6% year-over-year to $738 million in 2013, and we successfully raised $200 million in convertible bond offering with highly favorable terms. Also, our two largest shareholders committed to participate in the convertible bond deal pro rata, which will inject an additional estimated $86 million in cash. In addition, we attained an investment-grade credit rating from S&P and are one of the few semiconductor companies to have obtained such rating. At the end of 2013, we had $462.5 million cash on hand, an increase of $104 million compared to the end of 2012. Our total CapEx for the year was $770 million. In addition, our gross debt-to-equity ended 2013 at 45.2%, compared to 48.3% the previous year. In terms of technology development, during 2013, we made progress in preparing our technology offering for several notable upcoming market opportunities.
I am happy to announce that our 28 high-k metal gate and polysilicon process are both process-frozen and are entertaining commercial IPs and customer product verification through our MPW offering. We are planning to provide over 100 IPs from internal and third-party IP partners to facilitate customers' 28 designs, of which also include the recently announced Arm Artisan physical IP platform. We target modest revenue from 28 process technology at the end of 2014 and more significant ramp-up in 2015. Our 40 nanometer revenue increased significantly to account for 16% of the revenue in the second half of 2013. In terms of differentiated technology, SMIC developed an embedded EEPROM platform, which has been adopted by a majority of China's bank card IC design houses. Small volume production is planned to begin in the second half of this year.
Meanwhile, more significant ramp-up of the volume is targeted to take place next year. Development of BSI, or back-side illumination, for the CMOS image sensors are also well underway, with initial ramp-up targeted for the fourth quarter this year. China continues to be a leading source of high growth for SMIC. In 2013, China revenue accounted for 40.4% of our revenue, with a noteworthy growth rate of 44.9% compared to 2012. As China IC consumption continued to be strong and with the rollout of LTE and the switch to all bank cards to IC cards, we believe that SMIC has the right technology and is in the right market to capture these future opportunities. We continue to be prudent in our spending and expansion. 2014 CapEx for foundry operation is planned to be approximately $880 million, of which around $570 million is for our new Beijing project.
Our Beijing project is 55% funded by SMIC and 45% funded by the other JV shareholders. The extra capital required of SMIC to put up is about $625 million, which is well within our means. Our new Beijing project is targeted to have a small line of equipment moved in during the second half of this year, and the actual ramp-up is intended for 2015. This year, we plan to expand our 12-inch fab in Shanghai to 14,000 12-inch wafers per month. We also plan to expand our current 8-inch facility, our Shanghai 8-inch fab from the current 90,000 wafers per month to 96,000. Our Tianjin 8-inch fab from 36,000 wafers per month to 39,000 wafers per month. Looking forward, the first quarter of the year is expected to be weak, partially due to seasonality and continued inventory correction on the 12-inch, as well as 12-inch product transition.
To address this situation, some of our heavily loaded 8-inch products are migrating to 12-inch. Meanwhile, new differentiated products are filling our 8-inch capacities. We are hopeful about the second quarter of this year, and in the long run, we have confidence in our strategy and capacity, and our capability to capture growth opportunity, especially those in the China IC market. We maintain our target of achieving double-digit annual revenue growth and above foundry industry growth, and target improved growth margin. We continue to work with our new and existing customers to capture opportunities in 2014 and onward. Thank you for your time. I will now hand the call to Gareth for overall business and the financial commentary.
Thank you, T.Y., and thank you, everyone, for joining us today. I will now take a few moments to summarize our 2013 unaudited full year highlights, and then fourth quarter 2013 financial results, followed by our first quarter 2014 guidance. You may also refer to our quarterly financial presentation on our website. Please note that all currency figures are in USD unless otherwise stated. To begin, I'll recap our 2013 unaudited full year financial highlights. Revenue in 2013 reached a record high of $2.07 billion, an annual growth of 21.6% when compared to 2012. Our net profit attributable to owners of the company also reached a historical high of $173.2 million, compared to $22.8 million in 2012. Revenue from 40/45 node applications increased to 12.1% of wafer revenue, compared to 1.1% in 2012. Cash from operation increased 69.6% from $435 million in 2012 to $738 million in 2013.
At the end of 2013, we had $462.5 million cash on hand, an increase of $104 million compared to the end of 2012. Capital expenditures for foundry operations in 2013 were $651 million. Capital expenditure for non-foundry operations were $119 million, which were mainly for the construction of living quarters for employees as part of the company's employee retention program. Our debt-to-equity ratio was 45.2% at the end of 2013, compared to 48.3% at the end of 2012. Now, I will highlight our fourth quarter 2013 results. Revenue including wafer shipments from Wuhan Xinxin Semiconductor Manufacturing was $491.8 million in Q4 2013, representing an increase of 1.2% year-over-year, and a 7.5% decrease quarter-over-quarter. Non-GAAP revenue, excluding Wuhan Xinxin Semiconductor Manufacturing wafer shipments, was $483.6 million, representing an increase of 10.6% year-over-year and a decrease of 4% quarter-over-quarter.
Gross margin, including wafer shipment from Wuhan Xinxin, was 18.9% in fourth quarter 2013, compared to 19.9% in fourth quarter 2012, and 21% in third quarter 2013. Non-GAAP gross margin, excluding wafer shipment from Wuhan Xinxin, was 19.2% in Q4 2013, compared to 21.9% in Q4 2012, and 22.1% in Q3 2013. Now, let's look at our financial statement in detail. Revenue decrease in the fourth quarter of 2013 was mainly due to a decrease of wafer shipments, partially due to Wuhan Xinxin wafer shipment decline and 12-inch demand weakness. Revenue from Wuhan Xinxin was $8.2 million in Q4 2013, compared to $30.6 million in Q3 2013. There will not be any wafer shipment from Wuhan Xinxin from Q1 2014 onwards. Our Q4 2013 gross margin, including wafer shipment from Wuhan Xinxin, was guided 18.5%-21.5% and resulted in 18.9%.
The decrease in gross margin was primarily due to product mix change, low utilization, and provision for customer claims in Q4 2013. Operating expenses in Q4 2013 were $84.8 million, compared to $63.4 million in Q3 2013. R&D expenses increased to $46.3 million in Q4 2013 from $37.6 million in Q3 2013, mainly due to an increase in R&D expenses associated with higher R&D activities from quarter to quarter. A decrease of $4.3 million in funding of R&D contract from the government in Q4 2013 compared to Q3 2013. General administrative expenses increased to $36.6 million in Q4 2013 from $24.7 million in Q3 2013, mainly due to, one, increased factory expenses recognized, and two, a bonus accrual related to an increase in employee productivities in Q4 2013. Other operating income was $6.4 million in Q4 2013 compared to $8.2 million in Q3 2013.
The change was mainly due to a decrease of gain arising from the disposal of the company-owned living quarter in Shanghai, and two, a gain arising from the deconsolidation of Brite Semiconductor Corporation and its subsidiaries due to loss of control. If excluding the effect of foreign exchange, funding of R&D contracts from the government, gain arising from a disposal of living quarters, employee bonus accrual, the non-GAAP OpEx would be $84.8 million in Q4 2013 compared to $77.5 million in Q3 2013. Profit from operation in Q4 2013 was $8.1 million, compared to $48.5 million in Q3 2013. Moving to the balance sheet. At the end of the fourth quarter of 2013, our other financial assets increased to $240.3 million in Q4 from $2.6 million in Q3, primarily because the company issued $200 million zero-coupon convertible bonds in Q4 2013, and temporarily invested them in short-term investment.
Meanwhile, our long-term borrowing increased $47.5 million, and short-term borrowing decreased $157.8 million compared to the previous quarter. In Q4 2013, our cash ratio, quick ratio, and current ratio all improved compared to the prior quarter, demonstrating improved liquidity. In terms of cash flow, we generated $205.4 million cash from operating activities in the fourth quarter of 2013, compared to $269.6 million in the third quarter of 2013. Cash used in investing activities increased by $56 million quarter-over-quarter. Cash flow from financing activities decreased from $154 million to $52.7 million. Cash and bank balances at the end of Q4 2013 was $462.5 million, compared to $473.5 million at the end of Q3 2013. To examine our revenue by application, the consumer segment was our biggest contributor to revenue this quarter. Revenue from this sector contributed 40.3%. Revenue from the communications contributed 39.8%.
Geographically, revenue from North America contributed 40.3% of our total revenue. Revenue from China contributed 40% of total revenue. Eurasia contributed 11.7%. In terms of technology, revenue from 45/40 nanometers contributed 16.3%. Revenue from 65, 55 node and 90 nanometers decreased 29.2%. Meanwhile, 0.13-micron above line width increased 3% quarter-over-quarter. In terms of our overall capacity, total monthly capacity at the end of the fourth quarter was 234,000 wafers, compared to 231,800 wafers in the third quarter. The change was primarily due to increased 45/40 capacity in our Shanghai 12-inch fab. The overall utilization was 87.4% in the fourth quarter of 2013, compared to 88.2% in the third quarter of 2013. Looking ahead to our first quarter in 2014, revenue is expected to decrease 5%-9% quarter-over-quarter, which is $440 million-$460 million.
This revenue guidance is given in relation to the revenue without wafer shipment from Wuhan Xinxin Semiconductor Manufacturing in Q4 2013. There will not be any wafer shipment from Wuhan Xinxin Semiconductor Manufacturing from Q1 2014 onwards. Gross margin is expected to range from 16%-19%. Non-GAAP operating expenses, excluding the effect of foreign change, employee bonus accrual, funding of R&D contract from the government, and gain from disposal of living quarters, are expected to range from $88 million-$92 million. Funding of R&D contract from the government and other operating income is targeted to be around $15 million-$20 million in first quarter of 2014. The planned 2014 capital expenditure for our foundry operation is approximately $880 million, of which around $570 million is for our new Beijing project, which is 55% funded by SMIC and 45% funded by the other shareholders of the project.
In addition, we have budgeted in 2014 capital expenditure of non-foundry operation of approximately $110 million, mainly for the construction of living quarters. I will now hand the call back to En-Ling Feng 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 question to two per person. Operator, please assist.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Yes. Hi, good morning. Thank you. My first question actually on the N-1 , the 65 and 55 dropped by about six points to 21% of sales. If you could talk a bit about what is taking place on that node, if it's an inventory correction or if you're seeing some applications migrating down to 40, and if you expect this node to come back or more of the growth needs to come from 40 now.
Thank you, Randy. Yes, we are seeing a migration of some of our existing customers to the more lower node. At the meantime, we are also seeing and actively recruiting a lot more new tape outs. In first quarter this year, we will have a very strong new number of tape outs, so that in the future, we expect to make up this loss in the wafer amount. We are targeting to get more loading in the quarters to come.
Okay. Thank you. The follow-up question then, in the remarks you talked about targeting over foundry growth and over 10%. If you could list out where you're most optimistic for this year to achieve that, maybe taking the different opportunities between the bucket of China customers, the specialty, and then also the leading edge, like 40 nanometer, where you're most confident or optimistic on some of the growth, which areas?
Okay. I think there are a couple areas. Last year, our 40 nm had grown from
the year before, about less than $20 million-$ 200 million revenue. This year, because of the fully built capacity, we expect to have a significant growth again. In addition, we are building up slightly our 8-inch capacity to entertain the additional customer loading. Upon these two areas, we are aiming to have this growth again this year. As you can notice that last year, our capacity growth is around 6%-7%, but we were able to have a significant revenue growth. Okay. We would like to target the same type of revenue growth.
Okay. The final question, just on the CapEx, to think what the implied depreciation would be. For the building, the $110 million for the dorms, how would that flow through or be depreciated? Does that just flow into the OpEx, or is there some amount that hits COGS with that? If you could also say the 2014 depreciation and how that ramps through the year.
Yeah, Randy. We are expecting that there will be a slight increase in the depreciation overall, maybe in tune of $20 million. No, in terms of year-over-year depreciation increase. Yeah.
Okay. Does the land or the dormitories, does that just go in as an OpEx, or is that depreciated over a longer lifetime?
Oh, yeah, for the living quarters, part of them, we are going to sell to our employees. So that we are going to have a rather quick recovery of capital. And part of them, we are going to rent it to employees, and then we are going to depreciate over a relatively long period of time.
Great. Thanks a lot.
Your next question comes from the line of Daniel Heyler from Merrill Lynch. Apologies, Daniel Heyler. Please ask your question.
Thanks. Good morning, gentlemen. Thanks for taking my call. Just a couple quick ones first. I was wondering if you could elaborate a little bit on the bank card initiative. Why is that ramping in 2015? I understand there are a number of competitors in that space. After this does ramp significantly, what kind of contribution to revenue you think it would be?
Okay. I think that right now, we can see that the government's mandate is to change over from magnetic card to IC card in 2015. This year, most of our customers are verifying our products and with a small volume of production at end of the year. A more significant contribution to our revenue will happen in 2015.
Could you give us a sense of how big this will be? It seems to be taking longer than previously expected, right? I'm wondering, because as that gets delayed, that probably would invite more competition, I would think. I'm wondering how much of this market you think you can take.
Actually, we have consistently projected that this changeover has been published a while ago, and this changeover has always been 2015. Our expectation has been that the ramp-up will be in 2015. Certainly, we had done our preparation for a long time and to make sure that we are engaged and heavily entrenched in this particular market. That's why we think that we are well-positioned in this market. Four of the six products that have gone through the domestic certification process uses SMIC's technology, and we are getting new engagement from other customer as well. We feel that this part of the market is coming together pretty well.
Okay. My second question was relating to your comments previously on some of the government funding. I was wondering if we could just get some specifics there. I think I heard you say the first quarter would be about $15 million-$20 million government funding. What was the number, maybe Gareth could tell us what the fourth quarter number was, just so we have an apples-to-apples comparison on how that's affecting the quarter-on-quarter change.
In the full quarter, in terms of the R&D grant, is about $4.7 million. We have also received other grants. Together, it's about $19 million.
Okay. Well, go ahead.
For the first quarter, what we mentioned is $15 million-$20 million, which is including R&D grants and other operating income. It's not just purely R&D grants. Yeah.
Okay. Just to be clear, in the fourth quarter, the $4.7 million, and then there was another $16 million, then at about $20 million, $21 million for the fourth quarter, and you're anticipating that to go to $15 million-$20 million in the first quarter?
$15 million-$20 million. That's right.
Right. From about $21 million, aggregated $21 million, including all grants in the fourth quarter.
That's correct. Yeah.
Okay, great. Thank you.
Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
Great. I am wondering if you could talk a little bit about break-even levels. I know you talked about objectives of sustainable profitability, but it looks like at the midpoint of guidance here, especially as we exclude your grants and subsidies, it maybe looks like your structural break even maybe is deteriorating. Could you talk a little bit about break-even targets currently and targeted for this year, and what are the assumptions for a gross margin and OpEx at that break-even level?
First of all, I want to make a slight correction in terms of Q4, the R&D grants and other grants. All together, it is about $13 million, not $19 million. Just a bit of correction there. Secondly, in terms of break-even utilization, I think we are still at about low eighties. So I think there is no changes yet.
All right. Beyond just break-even utilization rate, can you talk just a little bit about even from an ongoing OpEx perspective? It does seem like OpEx, excluding R&D subsidies and other grants, it seems to be migrating maybe a little bit higher. I am just trying to understand, has the structural profitability changed in any way as far as you are concerned?
Yeah. In terms of OpEx, I think if you go beyond the quarter to quarter fluctuation, this year, our OpEx as a percent of revenue is about 15%. It is excluding all the R&D funding and other operating income. Going forward, because we are going to invest more in R&D, so we are going to have some slight uptick in the R&D expenses. But I think overall, our OpEx will maintain at about mid to high teens.
Okay. Next question was just on 200 mm versus 300 mm utilization rates. Could you just talk a little bit about what they were in the fourth quarter and the expectations as you go into the first quarter?
I am sorry, can you repeat the question again?
200 versus 300 mm utilization rates. What kind of absolute levels were they in the fourth quarter, and what do you think they are in the first quarter?
For the 8-inch, is pretty high, is over 90%. For the 12-inch, it will be a bit lower.
I'm sorry, that's in first quarter or is that in fourth quarter?
No, fourth quarter. Yes.
Do they both fall equally into the first quarter given the total revenue guidance, or is there some relative shifts that are taking place?
We are looking at overall a low utilization in first quarter. Yeah.
Okay. My last question, just if you can make any comments on the first quarter guidance. You talked a little about 200 mm versus 300 mm being, I guess, the same kind of falloffs going on. I am curious about regional mixes or technology mixes. For example, your China revenues actually underperformed your total top line in the fourth quarter. Is there something more to discuss there? I am also interested, can 4X node continue to grow on an absolute level basis, even though total revenues are declining in the first quarter? Can you talk a little bit about first quarter mix? That is the last question from me.
In 2014, we are aiming to grow our 40 revenue further, and this is one of the major objective we have. Overall, we think this inventory correction is quite temporary, and is mostly when we look at our customer base, I think they are experiencing some slowdown, and some of it is our customers going through, I think, a commercial merger and acquisition that has somewhat slowed down their revenue stream. We believe that in the long term, the strength of our customer base will come back.
Yes.
I do not know whether that answered your questions.
Your next question comes from the line of Bill Lu from Morgan Stanley. Please ask your question.
Yeah. Hi, good morning. This is kind of a follow-up to Steven's question, but if you look at your 40-nanometer capacity this year, can you help me with how much capacity grows? It is a little bit hard to figure out because I know you are going to use some of the capacity from the Beijing facility as well for 40. So can you help me with how much capacity grows at 40?
Okay. This year, we will have a full 14,000 wafer per month of capacity, whereas last year we are ramping and going from 5,000 to 12,000. So that effective capacity this year will be a significant increase over last year.
Sorry, but the 14, is that an average for this year, or that is the end of the year?
Average. Starting from the beginning of the year.
Okay. If you look at the 40, as you just mentioned, your Chinese customer going through some changes in terms of consolidation and such, do you think that the Chinese customer base starts ramping in 2Q, or is that going to take a little bit longer?
We hope that there will be a recovery of the overall business in 2Q indeed.
Okay. When you look at your full-year guidance, you said that you hope to grow above the industry average. Can you help me with how much of that is unit-driven versus ASP-driven?
Say that again, whether it is industry-
I am wondering if you are going to grow above, say, 10% -
Yes.
- are you mostly assuming that unit growth above 10%, or are you assuming that ASP is going to increase as well?
We definitely expect that there will be growth, a combination of the unit as well as the ASP.
Okay. My last question is on the smart card, the bank card business. I guess I also had a sense that maybe that was going to ramp, maybe second half of this year as well. If you look at what you're expecting out of that business now versus, say, three months ago, if timing is the same, has the volume expectations changed at all?
Our internal model, looking at the volume, in our model, there has not been a significant change.
Okay, great. Thank you.
Thank you.
Your next question comes from the line of Miles Xie from BOCOM. Please ask your question.
Hey, good morning. Thank you for taking my question. My first question will follow up on the 40, 45 mm we see. It will be important growth driver in 2014. On the gross margin side, I'm wondering how fast the pace that 45 mm gross margin will approach the corporate average level.
Yeah. Because right now we're still in the process of ramping up the 40, 45 node, so the margin right now is still below corporate average. As to when we can reach the corporate average, it depends very much on the utilization for the fab. We expect if we can maintain a very high utilization, we can get close to the corporate average margin.
Yeah. There are two factors this year that we are working very diligently. Certainly, one is the attracting the number of new tape-out, so that we can ensure the utilization. Secondly, that we are working heavily on the cost. We are already seeing the fab efficiency and our cost, doing well, and in accordance to our expectation.
So, can you give a little bit more, for example, in the fourth quarter this year, how was gap between the 45 nanometer to the average? Would there be something like just
We do not disclose gross margin by node. But it is safe to say that it is positive, but it is still below the corporate average.
But it will still be below the average?
Yes.
Okay. My second question will be on the 28. We know we are going to start the competing in this year. I'm just wondering what kind of application we're targeting and who will be the major base for the 28.
Okay. We have a number of potential customers, that includes both tablets as well as communication baseband applications. We also have interest and tape-out to utilize the node for the RF applications.
Okay, thank you.
Your next question comes from the line of Szeho Ng from BNP. Please ask your question.
Oh, hi, good morning. Just want to know about your ramp-up schedule for the Shenzhen fab.
Okay. Yes. We are in the process of already installing the equipment. Shenzhen Fab is scheduled to be ramped this year. We are installing some equipment at hand, and we are also looking at a number of opportunities to acquire used tools in the whole retired fab, running fab, that is retiring. There are a number of opportunities this year that will enable us to have significant acquisitions of these tools.
Hmm. I see. I know that the maximum capacity is 50,000, but what will be the target install capacity, say at end of this year?
We are not ready to disclose that yet because it would depend very much on the opportunity and how much equipment we can acquire in the market.
Hmm. Okay. All right. My second question is on the interest expense. If I look at the Q4 number, it seems to be a big drop-off compared with Q3. How should we model the interest expense on a quarterly basis going forward?
I think, yes, Q4 is lower than Q3, mainly because we have received some grants from the government. I think the Q3 number will be more of an ongoing number you can use for modeling.
Hmm. Okay. All right. Okay. Thank you very much.
Your next question comes from the line of Suji De Silva from Topeka. Please ask your question.
Hi. Thanks for taking the question. It sounds like the R&D in the fourth quarter, maybe the first quarter you're guiding, has more tape-outs front-loaded than you would expect throughout the year. Is that correct to think the R&D has some tailwind as the tape-outs level off in the first half of the year?
Let me answer that question. Indeed, we are seeing a very much increased interest in both our 28 nanometers, both our high-k as well as polysilicon, as well as a number of our unique process, differentiated process. Therefore, we are going to see somewhat of an increase in the R&D expense, which I think will guarantee our future in our profitability as well as revenue growth.
Okay. How many 10% customers do you have, and might you expect a China customer to grow into the 10% range by the end of 2014?
10%. Actually, the customers do fluctuate from quarter to quarter, but usually we have about one to two customers that's above 10%.
Would you potentially expect the China customer to grow to be a 10% customer by the end of this year?
I think the China customers are growing significantly. But at this moment, they may be approaching, but it's very difficult for me to say that whether they will be able to grow beyond 10%. But amount we have already seen that the top 10 customers, about almost half of them come from China nowadays.
Thanks. That color helps. Lastly, can you tell us how many customers are evaluating your 40, 45 nanometer versus the past couple of quarters? How much of that's growing, and maybe even 28 nanometer? Just to get a sense of how many customers are looking at it now. Thank you.
I think we have four or five additional new customers that's evaluating our 40, 45. 28, we have at least four or five different customers looking at our 28.
Thank you very much.
Your next question comes from the line of Eric Chen from Daiwa Securities. Please ask your question.
Okay. Good morning, this is Eric from Daiwa. Dr. Chiu, I may miss, do you talk about the CapEx for this year? For your CapEx this year, any plans? The internal percentage, how many percent for equipment, R&D, the 20 nanometer process, and 14 nanometer process? Thank you.
I am going to defer the detail number to Gareth.
Yeah. Our CapEx for foundry operation in 2014, as we mentioned in our earning release, is $880 million, of which $570 million is for our new Beijing fab, which is 55% funded by SMIC and 45% funded by the other shareholders of the project. We also plan about $110 million CapEx for the construction of living quarters for our employee this year.
Okay. For the Beijing fab, the $570 million, that is pretty much for the 28 nanometer process, right? Or for the 40 nanometer process?
That is correct. I think our $570 million, half of it is for the equipment CapEx, and the other half is our facility CapEx. The equipment CapEx, definitely that is for our 28 nanometer, but certainly these are the 40 nm capable as well. There is a fungible part in this particular capacity. The capacity, maybe that you ask, is that our plant capacity for this investment is about 6,000 per month.
Okay, so you talk about the 50% for equipment capacity, that is for the 28 and the 40, right? Or you mentioned 20 as well, is it? I am sorry.
No, I did not mention 20. Yes. So it is for 28, and it is 40 compatible.
Okay. 40 compatible. Okay. One more question. That is a follow-on question regarding the China client. We know around 40% of the total revenue from the China client last year. How many, the revenue percentage, we should give the expectation for this year in terms of the China client revenue contribution?
We expect that the China revenue will still grow slightly. But, I think from the number of tape-out, we expect that there will be a gradual balancing of our global customer base, as well as our China customer base. So it will certainly reach a plateau somewhere north of 40%. Yeah.
Okay. You mean for the whole year average is somewhere near 40%?
Yeah. Somewhere north of 40%.
Dr. Chiu, you just mentioned the whole year revenue growth will be above the foundry industry growth average. That will be above the 10% year-on-year growth. I assume your China client higher, so that mean your China client revenue should be higher than the 45% of the total revenue this year. Do I make anything wrong on my assumption?
I think that it is close to what we are perceiving as well.
For your China client, how many percent, roughly, the internal unit-wise by using the 40 nanometer process, roughly?
I'm sorry, I don't have that number at that time.
I think right now for our 40 nanometer revenue, I think if you look at the last two quarters, probably half is contributed by our global customers, half is contributed by our Chinese customers.
I see. For 40 nanometer process, what kind of revenue percentage we will see, let's say in Q4 this year, roughly?
I think for the whole year, we think that 40 nanometer will contribute about mid to high teens revenue.
Okay. Thank you.
Your next question comes from the line of Andrew Lu from Barclays. Please ask your question.
Thank you for taking my question. A couple quick questions. Regarding the Q4 utilization rates, about 87%, only small down compared to Q3 last year. The wafer shipment down about 7%-8%. What is the reason behind, how come the utilization is enough for capacity increase, but wafer shipment down?
The utilization is affected by both the current quarter shipments and also what we expect to ship in the next two quarters. There is always a timing difference there.
Okay. Sometime we always have this kind of issue. You are not calculate the utilization rate on the wafer out. It is a wafer start, right?
Yes. Another reason that I want to mention, I think we should be very unique for this quarter is because, actually our shipment, which also include the shipment from Wuhan, had came down quite a lot. Actually, the shipment from Wuhan would affect the overall shipment for the quarter, but would not affect the utilization for our fab.
Understood. The second question I have is for first quarter guidance. Any color on the shipment versus ASP?
Shipment versus ASP.
You have the revenue guidance, roughly down 9%. Taking out Wuhan, roughly down about 6%-10%, that kind of number. I wonder whether, is ASP flat, the shipment down 6%-10%, or there is some mix change on the ASP as well?
I think in Q1, we are also seeing a modest down in the ASP as well.
Is it on the mix change or on the apple-to-apple price decline?
I think a combination of both.
Thank you. The last question I have is for this year, revenue growth guidance. Earlier, you expect probably similar to last year growth, Dr. Chiu mentioned, I think, earlier. But if second quarter, we assume back to 100% utilization rate, and remain at 100% in Q3, Q4, based on the capacity provided, you end up with a 5% revenue growth. Unless we see another 5% or 10%, that can increase our ASP. I do not know what kind of number you guys are looking for to have a very strong number. Because for first quarter, we actually see year-over-year decline by 10%.
Okay. I think that here that we need to specify that in our revenue, when we are looking at the 2014 revenue, we are calculating based on the removal of our Wuhan and comparing that with 2013 without Wuhan as well as 2014 without Wuhan.
Okay, understood. Thank you.
To give a sense, Wuhan revenue in 2013 is about $110 million. Yeah.
Ladies and gentlemen, 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 and again, thank all of our shareholders, customers, employees, and suppliers for their trust and support. Thank you, and see you next time.
Thank you. Bye.
This is the end of SMIC's fourth quarter earnings conference call. We thank you for joining us today.