Welcome to the Semiconductor Manufacturing International Corporation's fourth quarter 2012 webcast conference call. Today's conference call is chaired by Dr. T.Y. Chiu, Chief Executive Officer, Mr. Gareth Kung, Chief Financial Officer, 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 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. En-Ling Feng, Senior Director of Investor Relations, for the cautionary statement.
Hello, everyone. Welcome to SMIC's fourth quarter 2012 earnings conference call. For today's call, our CEO, Dr. T.Y. Chiu, will first provide some general remarks. Then our CFO, Gareth Kung, will present the financial commentary. This will 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 www.smics.com under Investor Relations in the Events and Presentations section. Please also be reminded of the safe harbor statement, which provides as follows. SMIC's statements of its current expectations are forward-looking statements subject to significant risks and uncertainties. The actual results may differ materially from those contained in such forward-looking statements.
Information as to those factors that could cause actual results to vary can be found in SMIC's Form 20-F filed with the United States Securities and Exchange Commission on April 27, 2012. Please note that all currency figures are in U.S. dollars unless otherwise stated, and that all references to 2012 annual figures are on an audited basis. I will now turn the call over to our CEO, Dr. T.Y. Chiu, for the opening remarks.
Thank you, En-Ling. Good morning and good evening to everyone. We wish you and your family a very happy Chinese New Year. Thank you for joining us for our fourth quarter and full year 2012 earnings webcast. I am pleased to report that SMIC has outperformed the foundry market cycle again in Q4 2012. We achieved record high revenue of $485.9 million, representing sequential growth of 5.4% and year-over-year growth of 67.8%. Furthermore, we delivered a net profit attributable to SMIC of $39.7 million in the fourth quarter. Revenue growth was mainly driven by increased demand for mobile product ICs such as baseband, Wi-Fi, NOR flash, CIS, and power management ICs. Based on our unaudited financial statements for the full year of 2012, we also achieved record high revenue of $1.7 billion, representing an increase of 29% year-over-year.
This significantly surpassed the 2012 year-over-year growth of world semiconductor sales of -2.9% and a pure-play foundry growth rate of 15%, according to iSuppli estimates. We deliver a positive income attributable to SMIC of $15.9 million in 2012, which is our highest in seven years. In 2012, because of our improved operation, customer service, and quality, SMIC gained significant customer confidence, which contributed to the drive in high fab utilization. Apart from improved operation, revenue drivers in 2012 also include demand for mobile devices. Notably, our revenue from China group customers grew 34.1% in 2012 over 2011, while employing our full spectrum of technology from 0.35 micron to 40 nm. Looking at our 2012 achievements, we are grateful to our hardworking and dedicated employees as well as to the strong support and trust from our customers.
Now to address our differentiation strategy, we have made positive progress within our specialty processes in 2012. In Q3, our 0.13 micron low power embedded EEPROM platform was made available. This enabled us to address China's fast-growing dual interface bank card market, as well as the worldwide contactless smart card market. In the fourth quarter, we made a significant breakthrough in the development of backside illuminated CMOS image sensor technology. The first test chip demonstrated good image quality. The complete BSI process technology is targeted to contribute revenue in 2014. This will serve the market for higher resolution of phone cameras and high performance video cameras. As we execute our differentiation strategy, we continue to see the expansion of our addressable market size, which give us increasing confidence in our strategic direction. Moving to give some update on our 45/40 nm progress.
Our 45/40 nm commenced volume shipment in the fourth quarter, and its revenue contribution more than tripled quarter-over-quarter to 2.6% of the total fourth quarter revenue. This increase was primarily due to the demand for mobile products from both international and domestic customers. In addition, we have an increasing number of 45/40 nm tape-outs in the first quarter of 2013. We are confident that our 45/40 nm capability will drive our revenue increase in 2013. Regarding 28 nm. Our 28 nm offering, including both high-k metal gate and PolySiON processes, is on track and is targeted to be ready by the fourth quarter of 2013. Next, let me comment on the China market. The Chinese fabless ecosystem is broadening as a growing number of mobile devices, both branded and non-branded, are equipped with baseband, RF, CIS, and specialty memory designed by major Chinese fabless companies.
According to iSuppli, Chinese fabless company overall revenue grew 15% in 2012, more than three times the global fabless growth rate of 4.9%. By providing quality and innovative products, Chinese fabless companies are penetrating the supply chain from tier one name brands to non-branded ODMs in all segments, from smartphones to feature phones to tablets. As the leading and the most advanced foundry provider in China, we have upgraded our technology portfolios, service, and quality to help all of our customers participating in this rapidly growing market. The latest survey published by the Ministry of Industry and Information Technology, China Software and the Integrated Circuit Promotion Center, CSIP, in November 2012, specifies that approximately 75% of Chinese fabless companies choose SMIC as their preferred foundry partner, a noticeable and a significant improvement as compared to 59% in 2011.
I'm happy to see that our effort this past year in augmenting our technology portfolio, improving quality, service, and design support has made measurable positive impact in both China revenue as well as in the independent customer survey. Now, I want to address the mobile market. According to IC Insights, mobile phone accounted for 24% of IC industry's revenue in 2012, and that share is forecasted to reach nearly 32% in 2016. More interestingly, in terms of dollar content, mobile phone IC revenue is expected to exceed standard PC revenue for the first time in 2013. $71 billion for mobile phone ICs versus $65 billion for IC used in the standard PC. Furthermore, according to iSuppli, China's smartphone market is expected to double in terms of units in the next four years, from 186 million units in 2012 to 377 million units in 2016.
Given that roughly 60% of our wafer revenue in the fourth quarter of 2012 is from mobile devices, including feature phones, smartphones, and tablets, we are confident that SMIC is well-positioned in these high-growth markets. Without diverse product offering for baseband, Bluetooth, Wi-Fi, Flash, CIS, RF, and application processors, we expect to continue to benefit from the rapid growth of the end market demand from communication and the consumer products, especially within China. To comment on Q1 2013, in contrast to our original expectations, Q4 demand had a late stage pickup. We expect Q1 to decline modestly given the seasonality, our fab maintenance period, and our stronger than expected Q4. However, we are again seeing strength in some segments in Q1. Therefore, our revenue forecast for Q1 remains cautious and ranges from up 1% to down 2%.
In conclusion, I am very pleased with SMIC's achievement in 2012, and we are starting 2013 with both excitement and caution. The road ahead is full of tall challenges and powerful competitors. But I believe we have the right strategy, the right focus, and the right team. We will continue to focus on sustainable profitability, growth, and shareholder value. Again, I would like to now thank all of our employees for their dedication and hard work, our shareholders, customers, and partners for their continued trust and support. I would also like to wish all of you and your loved ones health, happiness, and fulfillment. Happy Chinese New Year. I will now hand the call over to Gareth for overall business and the financial commentary.
Thank you, T.Y., and thank you, everyone, for joining us today. I'll now take a few moments to summarize our fourth quarter 2012 financial results, highlights of our 2012 full year unaudited results, and provide our first quarter 2013 guidance. You may also refer to our quarterly financial presentation on our website. All of our financial figures are prepared based on GAAP measures. Please note that all currency figures are in U.S. dollar, unless otherwise stated. Now turn to highlights of our fourth quarter 2012. We are pleased to report another strong quarter. Again, we achieved record revenue of $485.9 million, representing an increase of 4.5% quarter-over-quarter, an increase of 67.8% year-over-year. Net cash flow from operations was $189.8 million, compared to $119 million in the third quarter. Net income attributable to SMIC increased to $39.7 million, compared to $12 million in third quarter.
Diluted EPS was $0.06 per ADS. Looking into details of our income statement. Revenue growth in the fourth quarter of 2012 exceeded our original guidance, mainly due to the change in the product mix in favor of shipments with higher ASP. Referral revenue from Wuhan Xinxin was $40.5 million in the fourth quarter, contributing 10% to our total revenue. Excluding the referral revenue from Wuhan Xinxin for both quarters, our revenue increased 5.7% quarter-over-quarter. Gross margin was guided 18%-20% and resulted in 19.9% in the fourth quarter. As mentioned previously, it was mainly because the Shanghai 12 in fab entered volume production in the fourth quarter. As a result, all the production-related costs were removed from the R&D expense line and treated as manufacturing cost.
The inclusion of Shanghai 12 in fab production-related costs led to a 4.4% decrease in gross margin in the fourth quarter. For this same reason, operating expenses in the fourth quarter were guided to be in the range of $70 million-$74 million, compared to $106.5 million in the third quarter of 2012. Operating expenses in the fourth quarter were $44 million, which was offset by R&D grants of $10.1 million and a gain from property disposal of $20.7 million. The property disposal was from the sale of SMIC leasing quarter units to employees. If excluding these items, the normalized operating expenses would be $74.8 million in the fourth quarter. We also achieved significant improvement in operating income, which increased from $20.4 million in the previous quarter to $52.7 million in the fourth quarter.
Income tax expense was $10.6 million in the fourth quarter compared to $1.1 million in the third quarter, mainly due to the land appreciation tax related to the sale of the SMIC living quarter units to employees. Net income increased from $12.2 million in the third quarter to $39.9 million in the fourth quarter. Net income attributable to SMIC was $39.7 million in the fourth quarter of 2012. Moving to the balance sheet. At the end of the fourth quarter of 2012, our debt-to-equity ratio was 48.3% compared to 47.6% in the third quarter. The ratio slightly increased as our long-term debt increased by $127.6 million, while short-term borrowing decreased by $92.5 million. In terms of cash flow, we generated $189.8 million of operating cash compared to $119 million in the third quarter of 2012.
Cash and cash equivalents, together with restricted cash at the end of the fourth quarter, was $576.1 million, compared to $475.9 million in the previous quarter. To examine our revenue by application, the communication segment was again our biggest contributor to revenue this quarter. Revenue from this sector increased to $230.3 million, representing a sequential growth of 6.9%. The growth is mainly from an increase in handset-related applications. Revenue from the consumer segment increased 4.1% quarter-over-quarter, contributing to $207 million, mainly from gaming devices, set-top box, and smart cards. Geographically, revenue from each of our three regions grew. Revenue from North America grew 3.8% sequentially, contributing 54.4% of our total revenue. Revenue from China grew 3.9%, contributing 34.8% of total revenue. Europe/Asia grew 19.8%, contributing 10.8% of total revenue, as we ramped up orders from a European customer.
In terms of technology, revenue from 65/55 nm increased 5.9% sequentially, contributing 35.3% to our wafer revenue for the fourth quarter. Meanwhile, revenue from 45/40 nm more than tripled sequentially, contributing 2.6% of revenue in the fourth quarter of 2012. In terms of our overall capacity, total monthly capacity at the end of fourth quarter increased from 212,800 wafers to 219,300 wafers as our Shanghai 12 in fab successfully transitioned into a production fab. The overall utilization was 90.5% in the fourth quarter compared to 92% in the third quarter. The utilization decrease is mainly due to the added capacity of our Shanghai 12 in fab. The reported CapEx in 2012 totaled $499.3 million. This was lower than our guidance due to the longer-than-expected equipment lead time. Therefore, this previously planned CapEx will be reflected in 2013 CapEx guidance.
Looking at 2012 unaudited results, we record high annual revenue of $1.7 billion in 2012 compared to $1.3 billion in 2011, an increase of 29% year-over-year. Wafer shipment increased 30.2% year-on-year from 1.7 million wafers in 2011 to 2.2 million wafers in 2012. Gross margin improved from 7.7% in 2011 to 20.5% in 2012. Operating margin improved 16.6% from -14.5% in 2011 to 2.1% in 2012. Net income attributable to SMIC was $15.9 million, a seven-year high. Looking ahead at the first quarter of 2013, we are guiding up 1% to down 2% in revenue. Gross margin is expected to range from 17.5% - 19.5%. Operating expenses is expected to range from $74 million - $77 million, excluding foreign change, R&D grants, and asset disposal.
We estimate our 2013 CapEx for foundry operation to be approximately $600 million, of which approximately $100 million is CapEx carry forward from 2012 due to postponed equipment move-in. A majority of the 2013 CapEx is allocated for 12 in foundry operations. I will 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. 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. 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. Yes, thank you. The first question, just going into the growth, you have done much better or faster than the industry the last four to five quarters. As you look ahead to this year, talk about if you expect to continue to outgrow the industry or maybe your view on the industry and your growth into this year, and if that is still coming from the mobile and the China applications.
Okay. Our visibility is clear on the first quarters. The first quarter, as we have forecasted, it is between a growth of 1% to -2%. The rest of the year, we think that in second half of the year, there will be a pretty general growth again. But we do not have that figured right at this moment, but we feel indeed that we will still outgrow the industry average.
Okay. Thank you. I wanted to ask on the CapEx, with utilization now low 90s, how much capacity or maybe with your fabs, how much the wafer capacity grows through the year? An update on the Beijing fab, just your plans for timing to launch that, and potential financing or if you get government support, maybe an update on the next fab expansion plans. Thank you.
In terms of the capacity growth for 2013, the main growth will be in our 12 in fab in Shanghai, which is mainly for the 40/ 45 nm production. At end of Q4 2012, it was at 6,000 wafers per month. Our target is to increase to about 12,000 wafers per month by end of 2013. As for the other fabs, there'll be some marginal increase. For example, for our 8 in fab in Shanghai will grow from 90 wafers - 94 wafers per month. For our 12 in fab in Beijing increase from 35,000 wafers - 37,000 wafers per month. I think you also asked about the new project in Beijing. Right now, the fab is still under construction, and we don't think it will be in production throughout 2013. Did I answer your question?
Okay. Yeah. I guess for the Beijing fab, for financing, is that fully SMIC financed or would there be any Is there potential you could get some government support for that fab?
It will be a joint venture fab with the investment entities belonging to the Beijing municipal government. The agreement right now, we are still finalizing it, and we cannot provide details at this point in time. But you're right. It will be partly funded by the government entities in Beijing.
Okay. If I could clarify, if you get financing, would that help on depreciation? You only depreciate the portion that or if you can go into that detail, if it could save on that.
Sorry. Can you repeat the question?
Yeah. If it's, I guess, a joint venture. I guess some terms are still being finalized, but is it that if you don't outlay the whole capital, so it would save on depreciation, and then would there be profit sharing, I guess, to the extent you have details at this stage?
Yes. I think the plan is that the fab will still be majority owned by SMIC, so we will still consolidate, the fab as our majority-owned subsidiary. The CapEx spend in that fab will still be reflected in our financial statements. But as I mentioned, the funding will partly be coming from the joint venture partners.
Okay, good. Thank you.
Thank you for your question. Your next question comes from the line of Dan Heyler from Merrill Lynch. Please ask your question.
Yeah, thanks. Good morning, guys. I want to focus a little bit on the derivative technologies, where you've been doing very well. Are there other opportunities that you see in these areas? You highlighted a number of things that you're focusing on, but I wondered, is there any opportunity to expand your presence more in some of the high voltage areas, such as LCD drivers? If you wanted to do that, would you be able to acquire used technology or other fabs in China to grow that business? Just your thoughts on the derivative technology growth. Thank you.
Okay. Hi, Dan. Thank you for asking this question. Yes, we see a lot of other opportunities and some of them, we are already working on it. At this point of time, that we are not giving out a great deal of details, because we have found out that last time we review our technology, our competitor start to canvassing our customers. In the future that we will announce the technology once it's completely done and tape out and product come into the market.
Yeah. Thanks. Sorry for asking the question. I hope it doesn't create any problems for you in the future.
So—
Yeah, go ahead.
Let me say that we continue to explore our specialty technology since there are plenty of opportunity in such a large market in China.
That makes sense. Thanks. Maybe ask it this way, to grow your 8 in business, your fabs are pretty fully utilized, so do you envision that you would perhaps need capacity there? And would you prefer to acquire, to build fresh 8 in fabs? Thanks.
Yes, we continue to explore all possibilities. And there are opportunities for us to improve our own efficiencies like we have done in the past year. And we are also definitely looking at potential used equipment.
Used equipment. Right. Thank you. Another question was on the 40 nm. You had mentioned that this is an important growth driver this year. I wondered if you could elaborate a bit. Is that from you targeting existing customers that, say, are migrating forward, or have you been able to expand your addressable market?
Yes, we have been able to attract new customers to use this technology as well as some of our older traditional customers.
Again, I guess I'm wondering if this is going to be primarily driven by the mobile market, or would you be able to expand into other end markets? Some more details on 40 nm would be great, because that's an important growth driver for you this year. Thanks.
Okay. We are specializing in the low-powered aspect of the 40/ 45 nm. Therefore, the most natural product category indeed is for mobile devices.
Okay, excellent. Finally, on CapEx and capacity, would you tell us your CapEx budget for the year and how that is going to play out on a quarterly basis?
Yeah, this will be pretty evenly spread through the year.
All right. Just refresh us on the full number for this year.
Yeah. We are targeting CapEx for this year for our foundry operation to be about $600 million.
Okay, and how much that's going to be 8 in versus everything else? Just the split between 8 in and 12 in would be great. Thanks.
Yeah, I think you can assume the majority of the spend on the 12 in operation.
Okay. Could you tell us about the R&D line? You're working on 28 nm, which I presume is pretty expensive. What do you need to do in R&D this year, and what are you budgeting for government grants there? Thanks.
Okay. R&D. This year, our R&D budget will increase. Indeed, there are two areas of increase. Number one is the advanced technology area, both 28 nm as well as the 20 nm. But we are also ramping up our R&D in the mature technology area. So, we will see a visible increase in R&D spending.
Can you give us a ballpark in terms of absolute dollars?
If you look at our Q4 financials, the normalized R&D expenses is about 7%. You will see some creep up throughout 2013, maybe by about 1 percentage points-2 percentage point, throughout 2013. You also asked about R&D grant. This year, we receive about, I mean, 2012, we receive about $30 million R&D grant. For next year, of course, by the nature of it is a little unpredictable, so we cannot say for sure, but maybe still in the range of $20 million-$25 million, for the whole year.
Okay. Did you say, the full year 2012 number, just to be clear, that was $30 million, three- zero million?
Yeah. The whole year, 2012, R&D grant is about $30 million .
All right. Okay.
What I am saying is that for 2013, maybe in the range of $20 million - $25 million.
Sorry, but just what is the feeling, why would that be down, given you are doing a lot more projects, and mobile being one of them? Just your feeling there, why do you think that number would be down?
Well, I think we are just being conservative. Just the nature of it is a little unpredictable.
Okay. Great.
We have a few projects to be approved by the government, so we are not sure about the timing of the approval.
Excellent. Okay. That will be helpful if we could get quarterly updates on that one. Appreciate that. Thank you.
Yeah. Thank you.
Thank you for your question. Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
Great. Thank you. First, some industry perspective. Dr. Morris Chang made some comments about industry growth being about 7% this year. You quote a lot of the third-party researchers who size the foundry market of roughly $40 billion or so. Even if we say that's 10% growth, that's only an incremental $4 billion. When I contrast that with Morris's comment that his 28 nm revenue is going to triple quarter-on-quarter, that's about an incremental $4 billion for him alone.
He's kind of suggesting all the growth is just going to come from his 28 nm. I'm curious if you can talk a little bit about your expectations for industry growth for above 28 nm, 40 nm and above. What do you think that means, especially when you see SMIC is really not going to have 28 nm this year. UMC doesn't look like they're going to have much either. Just thoughts on growth above 28 nm this year.
Okay. Definitely. First of all, we respect TSMC's comment. What we see is that China IC is growing rapidly, and we don't think all of it is in the 28 nm. Indeed, that particular growth still contains a large component of more mature technology, 40 nm, 65 nm, and from 18 nm. At this moment, I do not have a figure for the growth in revenue outside of the 28 nm in China. But, we think that it still is significant.
Okay. I was surprised, I think last quarter you guys were speaking about targets of greater than 10% of revenue by the fourth quarter this year from 40/45 nm node. I think at the Analyst Day, you even mentioned it could reach the teens. You didn't mention it on this call. Has there been any change in your targets for 40 nm and 45 nm as a percentage of mix at the end of this year?
Steve, obviously, our visibility is for one quarter, so we are not in a position to provide guidance for the whole year. But I think our outlook have not changed.
Okay. Just one more quick one here. I was pretty excited out of the analyst meeting, all your discussion of your niche strategy, power management, MEMS, CMOS image sensors. You talked about integrated passives. You just mentioned about your backside illumination being ready for 2014. So can you just help me understand how big, quantified percentage of revenue, would you consider this niche strategy, was to your revenues in 2012, and what do you think this will be to 2013? Or is it really more still going to take a little bit longer and it's more 2014 when you have things like your backside illumination really contributing more?
Okay. Indeed, I think CIS already is a significant portion of our revenue. So last year, it is near between 5% - 7.5% of our revenue come from the CIS. Okay. For BSI, we expect that definitely will enlarge our access to this market. We believe that by early 2014, we should have a reasonable amount of our CIS that come with BSI technology. Does that answer your question?
Yeah, I guess for one segment of it. But if we added all those things in, you guys talk about your niche strategy for things like the EEPROMs and going after some MEMS, and even talked about microcontrollers and integrated passives. I understand CIS is 5%-7% of revenues, but if we lump in all of those segments, are those 10%-15% of revenues today, and you think they can be, I don't know, double or something year on year? Can you just give me some general idea what the total niche strategy for SMIC represents today in revenue and what it could a year from today, we'll say?
Okay. At this moment, I think that some of our specialty technology add up definitely greater than 15% of our revenue already. And we figured, we target to grow these specialty technology, to at least by a factor of two in the upcoming few years.
Okay. A few years. Okay, great. I'll get back in the queue. Thanks.
Thank you for your question. Your next question comes from the line of Szeho Ng from BNP. Please ask your question.
Hi. Good morning, gentlemen. I just want to know, what will be the desired level capacity scale you are targeting for 40 nm?
Our capacity for 40 nm by the end of 2013 should reach about 12,000 wafers per month.
At what capacity level will you achieve the gross margin breakeven for 40 nm?
We think that, by the end of 2013, we should be able to better than breakeven.
Better than breakeven. Okay. One more question. When would you achieve the 40 nm gross margin on par with their corporate average? At what capacity level you have that confidence? Yeah.
Yeah. We think that as we continue to ramp up the 40 nm production, the gross margin for that business should improve. I think, by end of this year, it will still be below our corporate average.
Okay. Last question. What percentage of the 40 nm equipment can be extended for 20 nm production? Maybe just from the percentage of equipment cost. Yeah.
If I hear your question correctly, you are talking about how much of that 40 nm capacity is also 20 nm compatible. Is that correct?
Yeah.
Yeah. What I can say is that, for the 6,000 wafers expansion for this year, from the 6,000 wafers to 12,000 wafers, that portion will be 100% 20 nm compatible.
Okay, great. Thank you very much. Good quarter. Yeah.
Thank you for your question. Your next question comes from the line of Miles Xie from BOCOM International. Please ask your question.
Okay. Thank you for taking my question. [Si Wei], [Dennis], [Annie], and [Hongquan], congratulations on the strong results. My first question is on the business outlook of the first quarter 2013. I see the guidance is from 1% growth to -2%. The fact is, it seems more positive on the first quarter and this year. Actually, I noticed from the previous guidance, we are seeing some decline first quarter, but now we see the upside is 1%. Can I consider this is more positive tone from the management? Do you see any upside on this guidance? Who will be the major driving for the first quarter?
I think we have to keep to our guidance, which is +1% to down 2%, which is based on current visibility. I think the strength for Q1 will still be in the mobile computing and for the 40 nm production. Yeah.
Okay. My second question is on the capacity. As you said, it's a 12 in where 40 nm will be 12,000 wafers per month by the end of 2013. My calculation shows that the capacity in 2013 may go low teens year-on-year basis. Is that a good assumption?
Yes, I think that's a good assumption. As I mentioned earlier, the main growth in the capacity for 2013 will be for the 40 nm capacity. There will be also marginal increase in the capacity for our 8 in fab in Shanghai and our 12 in fab in Beijing.
Okay. Thank you.
Thank you for your question. Your next question is a follow-up question from the line of Steven Pelayo from HSBC. Please ask your question.
Yeah, just a quick one. I understand the gross margins are down in the fourth quarter because of the Shanghai impact, but you mentioned Shanghai impact was about 400 basis points. I think you said 440 basis points here in the presentation. Total gross margins were down, what is it? Close to 800 basis points or so. I am curious, the other portion, the excluding of the Shanghai impact, where do you think that gross margin decline came from?
Yeah. You are right. I think excluding the Shanghai 12 in fab impact, I think the gross margin is down by about 3.2%. I think there is a combination of reasons. If you look at our utilization, quarter-on-quarter, it is down about 2%, and that has contributed partly to the decrease in the gross margin. Also, at the end of this year, we also made some inventory provision for some aging inventory. That also contributed to the decrease in the gross margin.
Okay, thank you for that. One quick one more for you, Gareth, and then one more for you, T.Y. The tax rate going forward, so obviously with the property sale, you had some issues here in the fourth quarter, but help me understand tax rate as we go through 2013.
Oh, I think, if we exclude the tax related to the property disposal, I think we should not be paying any taxes.
That continues for the full year 2013. You have enough loss carryforward to utilize.
Yes.
Okay.
Yes.
Okay. The final question. We talk a lot about China and China being 35% of revenues, but I also still get excited about a couple of big U.S. customers that you have. You also are talking about these new European customer that you have as well. When you look within those, I'm curious about your market share gain. How much of it is coming from deeper penetration, within those existing customers versus actually gaining new customers? The reason why I ask is, I think it's pretty well-known that Qualcomm is a large customer for you, primarily on a power management perspective. But, I'm interested in your opportunity or potential to penetrate other areas of such a large customer for things like app processors, baseband, that type of thing. So can you give us some thoughts on that?
Okay. I think you are right that we are gaining both new customers as well as penetrating more deeply with our traditional customers, existing customers. So a lot of our existing customers are indeed trying our 40/ 45 nm technology, and our goal is that this year that we will see some of that significant ramp-up, with both new customers as well as existing customers. They already have had a number of new tape outs, and so we are pretty excited about the upcoming opportunities.
Can you just quantify me, last question, number of customers that are above 10% of revenue and maybe what the top three customers maybe represent of total revenue. Help me understand the concentration of customers.
In terms of the customer concentration, our top five customers make up about 50%-60% of our revenue. That be quite consistent.
It has been consistent. Okay. Thanks, guys.
Thank you for your question. Your next question comes from the line of Rick Hsu from JP Morgan. Please ask your question.
Yeah. Hi. Happy New Year to you guys. My first question is about your depreciation cost. Can you give us a little bit color how your depreciation cost will look like for this year, 2013?
Yes. Based on our current CapEx plan, we think that our depreciation year-on-year will stay flat.
Okay. Basically it's flat year-on-year.
That's right. Yes.
All right. Then regarding your $600 million CapEx for this year, how are you going to finance? Are you going to finance all of them internally, or are you going to go for any external financing?
Yeah, I think, we will be able to finance it through our operating cash flow, which should be quite sufficient. In addition, we still have additional debt capacity we can draw down.
Okay. All right. Thank you so much.
Thank you for your question. Your next question is a follow-up question from the line of Randy Abrams from Credit Suisse. Please ask your question.
Yes. Thank you. I just want to ask one follow-up on the gross margin. With the moving parts, the depreciation flat, but then 40 nm ramps up at lower below corporate average. For your margins, if you grow through the year toward the high 90s utilization, can you get margin expansion where you'd think near full utilization margins are back load mid-20s. Or given where 40 nm is at, should we expect more stable margins around current levels. If you could give some feel for how margins could progress.
Yes. Randy, obviously, our visibility is just for one quarter. We cannot provide guidance for our full year gross margin. But using your scenario, assuming very high level utilization, yes, we can see our gross margin to improve to what you said.
Okay. That's helpful. Okay, and then on the pricing, in fourth quarter, I think you mentioned better mix products, or better ASP products. How does the mix shift look, or at least if you can guide for first quarter. Is that mix going to hold or would we expect, I guess, shipments relative to ASPs in first quarter, any change.
We think that, for Q1, you should see a slightly high mix for the 40/45 nm shipments. So, overall, I think the ASP should remain pretty flattish.
Okay. No, thank you for that.
Thank you for your questions. There are no further questions at this time. I would now like to hand the call back to CEO, Dr. Chiu, for the 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 support. Have a happy Chinese New Year and a safe journey to those traveling for the holidays. Thank you very much.
Happy Chinese New Year.
Ladies and gentlemen, this is the end of SMIC's fourth quarter earnings conference call. We thank you for joining us today.