Earnings Call: Q4 2011

Feb 9, 2012

Welcome to Semiconductor Manufacturing International Corporation's fourth quarter 2011 webcast conference call. Today's conference call is chaired by Dr. Tzu-Yin Chiu, Chief Executive Officer, Mr. Gary Zeng, Chief Financial Officer, and Mr. Ng Ming Fung, 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 on 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 instruction 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 you to Mr. Ng Ming Fung, Senior Director of Investor Relations, for the cautionary statement. Good morning, and good evening to everyone. Welcome to SMIC's fourth quarter 2011 earnings conference call. For today's call, our CEO, Tzu-Yin Chiu, will first provide some general remarks. Then our CFO, Gary Zeng, 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 the quarterly financial presentation are available for you to download at www.smics.com under Investor Relations, Events, and the Presentation section. Please be also 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 U.S. Securities and Exchange Commission on June 28th, 2011. I will now turn the call over to our CEO, Tzu-Yin Chiu, for the opening remark. Thank you, Ng. Good morning and good evening to everyone, and also a belated happy New Year greeting to all of you. Thank you for joining us for our earnings webcast. I would like to first address the state of our business. As we mentioned last quarter, the second half of 2011 was weak in terms of foundry business. We believe this was mainly due to the overall industry's conservative inventory level caused by economic uncertainties. As a result, our total revenue was $1.3 billion in 2011, representing a decrease of 15% year-over-year. With increased customer confidence and a recovering economy, we are seeing some rebound in Q1, and we are also targeting continued growth in Q2. To comment on our direction and strategy, we are continuing our effort towards sustainable profitability and being the preferred foundry provider in China as we continued partnering with international and domestic partners. In order to achieve this, our long-term strategy is to maintain our technology advancement as well as to pursue value-added differentiation. Our near-term strategy is to work on boosting the overall fab utilization and efficiency. Based on market sizing, growth, and margin trend, as well as our potential capability and resource, we have identified a few niche product lines which we aim to strengthen our unique value propositions. In some of these segments, we offer unique solutions, technology, and IPs in order to enable our customers to excel in these respective markets. We have strengthened our product marketing group in order to more efficiently and effectively link the market customer requirements with our internal technology development and IP development functions. The product marketing team's responsibility are to quickly and accurately discern market trends and to identify strategies to offer differentiated solutions to support our customers. With closer partnership with customers and initiatives to boost fab utilization, our Shanghai 8-inch fab loading is now fairly satisfactory, and our Beijing fab utilization improvement propagates throughout all our other fabs. Operationally, we continue to emphasize production improvement and customer service. To maintain stable yield and a competitive cycle time for the purpose of customer satisfaction, we have also instituted comprehensive systems and controls, as well as continuous operational improvement activities on a daily basis. As a result, positive customer feedback is a testament to our strengthened team and improved performance and operation. In Q4 2011, a leading customer ranked our Shanghai fab the number one 8-inch fab amongst all of its foundry suppliers. Another leading customer awarded us for excellent track record of support for their power management processor after achieving over 1 billion unit shipment of power management processors, with outstanding delivery record over the past year. Our Beijing fab's 65 nanometer service continued to improve on both cycle time and the defect density. In Q4, 65 nano contributed 21% of our wafer revenue, and we hope to continue to grow our 65 nano business to high 20s at the end of 2012, as our 65 nano utilization in our Beijing fab rise from increasing customers' demand. Total new tape out grew 8.7% in 2011 compared to 2010, with an increase mainly from 65 nano and below, with key growth driver from mobile and tablet application. Let me make some comments regarding the China market. Our China revenue continued to grow along China's semiconductor market. In 2011, our China fabless wafer revenue grew 16% compared to 2010, despite the overall industry weakness. This is equivalent to 30.6% of our wafer revenue in 2011. The overall demand in China is still relatively strong, with our China revenue up 4% sequentially, despite an overall -5.6% revenue decrease during the last quarter-over-quarter. More domestic customers are taking out in our 65, 55 nanometer with us in various communication and consumer applications. As well in one of our local flash memory customers' revenue to us more than tripled in 2011, becoming a key flash IC supplier for China's white brand handset market. As for technology development, we are very encouraged by our 45/40 progress with very positive feedback from our customers. Our 45/40 nanometer service has become competitive with respect to our peers. We have already begun our early risk production, and 45/40 contributed 0.3% of wafer revenue in Q4 2011. We have achieved competitive yield in a relatively short period of time, and our 45/40 product quality have met and exceed our customers' expectations. We are also collaborating with our Chinese customers in the mobile and tablet area using this particular technology node. Overall, in 2011, we have nine new tape out for 45/40 nanometers. With our effort in IP investment last year, our 45/40 IP library is increasingly robust and complete, and ready to simultaneously support COT and non-COT customers this quarter. This should bring us more new tape out for 45 and 40 nano, and widen our opportunity in advanced technology business. Our 32/28 development is on schedule as planned, and we target to have the process ready in 2013. To conclude, 2011 was a challenging year. Externally, we experienced a supply chain disruption from Japan's earthquake, customers' inventory issue due to weak economic situation, as well as some customers' technology transition from 65 nano to 45 nanometer. Internally, SMIC experienced We are on track in implementing new initiatives and strategies within the company again. I hope that the fruit will be evident in the quarters to come as we work to best serve our customers with differentiated service. In 2012, the first and the second quarter looks encouraging with a positive revenue guidance for Q1 and indication of an optimistic Q2. We remain cautious and diligent in executing our business plan for the best interest of all of our shareholders. I thank you for your continued support and look forward to updating you again in the future. I will now hand over the call over to our CFO, Gary Zeng, for overall business and financial commentary. Thank you, JY. Good morning and good evening to everyone. I will now take a few moments to summarize our fourth quarter and the full year unaudited 2011 financial results, as well as to provide our first quarter 2012 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. Looking at the fourth quarter of 2011, total revenue decreased 5.6% quarter-over-quarter to $289.6 million due to decrease in shipments. Wafer revenue from our managed fab, Wuhan Xinxin, was $24.4 million in the fourth quarter, contributing 8.4% to our total revenue. Excluding wafer revenue from the managing fab for both quarters, our revenue decreased 3.6% quarter-over-quarter. Fourth quarter gross margin was -7.4% compared to third quarter's positive 1.4%. The decrease of 8.8% points was mainly due to revenue decrease and the depreciation expenses increase from Beijing 12-inch fab ramp-up. Also, there was a settlement with Elpida of $11.4 million charged to our cost of goods sold. If excluding this one-time charge, fourth quarter gross margin was -3.4%. Apart from this settlement case, we have no other major litigation pending for the moment. In terms of our operating expenses, the overall OPEX was $85.7 million compared to the previous guidance of $89 million to $92 million. Our R&D expenses in the fourth quarter was offset by government grants of $22.1 million. Without the government grant for both quarter, R&D expenses was slightly up by $1 million, mainly due to the higher expenses for advanced node development. In the fourth quarter, there was other operating expenses for a net amount of $12.4 million, mainly attributable to a disposal loss on equipment. Without the government grants and the other operating expense, the normalized total OPEX was $95.4 million, up from $89 million in the third quarter. G&A expenses in the fourth quarter was up, mainly attributable to personnel-related reserve and the legal-related expenses. The increase in selling expenses was mainly due to expenses on sampling engineering wafers and mask use to promote sales. The tax expenses in the fourth quarter was $65 million, which include a reduction of $56.5 million in the measurement of deferred tax assets due to the prudent re-estimate of the next few years' taxable income to realize the previous deferred tax assets as required by accounting rules. After this adjustment, we have remained $31.8 million of deferred tax assets on our balance sheet. All in all, the loss attributable to the holder of ordinary share was $165.6 million in the fourth quarter of 2011. The fully diluted EPS was about negative 0.3 per ADS. In the fourth quarter, our debt-to-equity ratio further lowered to 38.7% from 42.4% as we paid down long-term debt in the fourth quarter. In an effort to increase the long-term debt to replace the short-term borrowing for a more balanced capital structure, we are pleased to announce we are signing a US$268 million three-year credit agreement today with a syndicate of local and overseas banks. This new loan facility will be served as general working capital of the company, and a part of it will be used for refinancing. In terms of cash flow, we generated $80.8 million operating cash compared to $160.9 million in the third quarter. Cash used in investing activity decreased primarily due to less CapEx spending in the fourth quarter. Meanwhile, there was cash flow from financing activity as we paid down $186.9 million of long-term borrowing. All in all, cash and cash equivalents at the end of fourth quarter was $261.6 million compared to $315.7 million in the previous quarter. To look at our revenue by application, revenue from communication was about flat compared to last quarter, contributing 44.1% to our total revenue. Meanwhile, demand on consumer product was relatively weak, representing a decrease of 12.3% quarter-over-quarter, contributing 42.5% of our total revenue. Regionally, in the fourth quarter, the revenue from China increased 4.8% quarter-over-quarter, contributing 34.1% to our total revenue. Revenue from North America decreased 5.4% quarter-over-quarter and has contributed 55.9% to our total revenue. In terms of technology, advanced technology of 19 nanometer and below declined 5.4% compared to last quarter and has contributed 30.5% of our wafer revenue in the fourth quarter 2011. However, within the advanced technologies revenue, our Beijing 12-inch fab's 65 nanometer revenue grew 20% quarter-over-quarter and has offset some of the decline. We continue to see momentum in 65 nanometer orders at our Beijing fab. Now turn to our capacity. For the whole year of 2011, SMIC's monthly capacity, which does not include Wuhan, increased by 12.6% year-over-year. Beijing's 12-inch fab capacity has increased 25% from 23,300 12-inch wafer per month to 29,100. Shanghai 8-inch fab has increased 4.7% from 89,000 8-inch wafer per month to 90,000. Changxin's overall capacity remain unchanged, but it's continuing product mix change in order to convert more capacity for power IC manufacturing. The overall utilization was 65.6% in the fourth quarter. Encouragingly, this utilization has increased within the fourth quarter period, especially at our Beijing 12-inch fab, as more 65 nanometer products have finished qualification and are starting to ramping up. Regarding the 2011 unaudited result, our revenue dropped 15.1% year-over-year to $1.32 billion, compared to $1.55 billion in 2010. Gross margin decreased from 19.9% in 2010 to 7.7% in 2011. We recorded a full-year net loss of $274.2 million in 2011. For 2012, we maintain discipline in spending and plan to spend about $430 million in CapEx for capacity and business expansion compared to $765 million in 2011. Among which, more than 80% of the CapEx is for 12-inch fab equipment, mainly to ramp up our 45/40 nanometer capacity to match with our customers' demands. Looking ahead at the first quarter of 2012, we are guiding our revenue to increase 7%-9% quarter-over-quarter because of an increase in shipment and our U.S. customers rebound. Growth margin is expected to ranging from 4%-7% due to revenue and utilization increase. We expect our operating expenses to range from $96 million-$99 million, up from $85.7 million primarily due to the increase in depreciation in our Shanghai 12-inch R&D fab and in R&D for advanced node development. Capital expenditure for the year of 2012 is expected to be around $430 million. I now hand the call back to Erning for a Q&A session of this call. Thank you, Gary. 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. Thank you. Ladies and gentlemen, if you wish to ask the question, please press star followed by one on your telephone keypad and wait for your name to be announced. Once again, that will be star one if you wish to ask the question. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask the question. Yes, I am. Good morning. Could you talk about a little bit more on your guidance for a 7%-9% rebound in first quarter relative to some of your foundry peers that are guiding in first quarter? What is driving some of your optimism? Any particular segments or new customer programs? Hi, Randy. Yes. We are having some noticeable ramp up in our 12-inch Beijing fab. This comes from communications as well as some consumer growing. This is also for the mobile communication area. Okay. Thank you. My follow-up question, for the 40 nanometer, if you could talk about your target for percent of sales for that business to grow to as we look later this year, and for the CapEx involved, how much 40 nanometer business could you support, or how much capacity do you plan to bring on with the CapEx budget? Okay. We expect the 40, 45 nanometer nodes revenue to grow up to about 9% of our fourth quarter by the end of 2012. Our present capital budget would give us around 9,000 to 10,000 wafers capacity by the end of the year. Okay. Thank you. Your next question comes from the line of Daniel Heyler from Bank of America. Please ask your questions. Yeah, thank you. Good morning. I had a question on the 40 nanometer ramp. How do you intend to be competitive and to grow that business, given the amount of excess capacity that we're seeing at most of the other foundries, which have talked about upgrading a lot of their internal fabs from 65 to 40? Will you need to be, say, more aggressive in pricing, or as you said earlier, you said there were potential for some niche applications to differentiate relative to the others. Could you just elaborate how you plan to address this market, and why customers would tend to use SMIC in this node? Okay. Thank you, Dan. The way we are approaching this competitive issue actually is working very hard on our defect density as well as delivering the pilots on schedule, on time. In addition, we have invested a great amount in our IP libraries. We are seeing that for this generation of technology, we have probably the most robust libraries amount of all our previous investments. We are seeing actually a lot of interest from international as well as domestic customers. Okay, great. Just a few housekeeping questions. I am going to list a few here. Could we get your depreciation for the full year target, Gary Zeng, with the full year number, and what the linearity is on the CapEx for the full year, how this is going to break out. Is it back-end loaded or front-end loaded? Thank you. Thanks, Dan. For the CapEx, as we forecast $430 million, we expect it will be quite linear as we are ramping up our 12-inch fab in Shanghai. I would expect the depreciation for full year of 2012 will be somewhere around $20 million to $30 million higher than 2011. Okay, thank you. I will slip in one more on the government funding and tax. What are you thinking there in terms of how we should model the tax part of the business model? That would be quite helpful. Thank you. As well as the R&D credits, how much we should think about this year in both those items. Thank you. For the government R&D grants, it's very hard to predict what we will get year in, year, and quarter by quarter, unfortunately, because they go through a lot of bureaucratic and government process. In the last few years, we are able to get the grants somewhere around from $35 million to $45 million each year. We hope this year we will be able to get very much the same as history, but there is no guarantee at all. In terms of tax, the adjustment really is according to the accounting rule adjustment. In the next few year, I don't expect we would have any tax burden, if I look at our financial future. Thank you. Okay. No credit either? No, I don't think so. Okay, great. That's very helpful. Thank you, gentlemen. Your next question comes from the line of Steven Pelayo from HSBC. Please ask your questions. Sorry. Can we talk a little bit about sustaining profitability, what type of gross margin levels you think you will need to do that? I think in 2008 you were doing kind of $400 million revenue quarters, but spending roughly $80 million in OpEx, and now you are kind of getting to the, I don't know, as much as $100 million range. I am curious, has the break-even rate actually increased a little bit? Can you just help me understand this goal of sustainable profitability, and what would the business model look like at that level? Thank you, Steve. Basically, as we are moving into the 40 nanometer era, we hope when we are ramping up our capacity, we will be able to increase our ASP, in turn, improve our margin. But as 40 nanometer is more expensive, we have to work very hard in order to bring up our margin. Our current break-even point, I would say, not necessarily higher than the past target, which at this point, I would say 80% to 85% is our target. But we right now, somewhere around 90% utilization should be our break-even point. Did I answer your question? I guess I was more interested on the margin side. Ultimately, what type of gross margins would you likely be needing to do? If I assume you are doing $100 million a quarter in operating expenses, roughly, 20% gross margin will roughly kind of talk about doing $500 million quarters then, right? That is a big revenue number away. So I am trying to understand what the gross margin would be at a break-even level. Okay, Steve. Well, basically, I think our current quarterly run rate is somewhat in the low side of our last eight quarters history. I would expect, if we can operate right our sales, we hope we will be able to bring up in a significant pace into the future. Still, we expect operational expenses should be somewhere around 20%-22% of our sales. But as our scale is increased, this may going down to somewhere around 18%. Right now, we have the 12-inch R&D fab in Shanghai, which cost us a lot of money. But as we're starting to ramping up the fab into a production fab for 40 and 40 nanometer production, we may consider bring up these expenses from the OpEx into above the growth margin line. This will take away the OpEx somewhere around 7%-9% expenses from the bottom to the up. Still, we will see how we operate the fab until we make the further decision. I noticed the long-term funding that you guys did with the bank syndicate. Do you foresee that you'll need any more here, or with the low CapEx, do you think you have the cash flow to sustain, I guess, is there any more funding requirements you think this year? If we are talking about only $430 million CapEx, then we probably will be able to free cash flow from operation, so there is no need for the further funding. But on our balance sheet, everybody notice, we have a lot of short-term funding compared with the long-term funding. So one of the key targets we would like to have is to convert this short-term funding into the long-term funding. So with that in mind, we will still need to have a long-term funding while reduce our short-term funding. Okay. Then final question is, you are talking a little bit about looking to differentiate and go into some of these niche markets. I guess, could you talk a little bit more about that, how big the market opportunity is, and I do not know, what would you say those currently contribute to revenues and what they could potentially be? Hi, Steve. This is TY. Okay. Long-term wise, actually, we see quite a few areas where SMIC can specialize and excel. For example, in the smart card application area, we know that China is moving that direction, and it has been actually announced that by 2015, all the bank cards will actually be smart card-based bank cards, and this will give us a great opportunity in the smart banking areas. Other areas that we are actually having a good presence is the Power Management ICs. We have seen a significant increase in our revenue, and we are also actually already working on the next generation process. So this is an area where we are going to, how do I say, put some more emphasis. There are other areas that SMIC has a heavy presence in China, and we will continue to invest in the advanced technology in this specialty application area. At this moment, I am not at liberty to reveal every technology areas where we are targeting. Okay, then just a final quick question. 2011, I guess, being complete, could you talk a little bit about customer concentrations, the number of customers, the fourth quarter or 2011, both would be preferred, that were above 10%? Could you repeat that question again? I'm wondering if you could help me understand your customer concentration. How many customers do you have that are more than 10% of revenue, either for the full year 2011, I assume you have to disclose that for your financials, but I was also even interested down here at the bottom in the fourth quarter of 2011, how many customers you had over 10%? Five customers contribute about 50% of our total revenue. The top two customers contribute about greater than 10%. Each or combined? The top two. Combined. Oh, each. I am sorry. Each. Okay. The top two customers is each. Okay. Excellent. Thank you very much. Your next question comes from the line of Donald Lu from Goldman Sachs. Please ask your questions. Good morning, Dr. Chou, Gary, and Ming. My first question is more a long-term strategy question. I think if you look back in the history of SMIC, the company raised about over $4 billion. Now you end up with around over $500 million net debt, with apparently the cash flow probably even in the near term. Also, if you look at your CapEx this year, it's $430 million relative to UMC's $2 billion and TSMC's $6 billion. I do not know about GlobalFoundries, but given its parent companies have probably unlimited cash there, it's probably going to be pretty high. It does not seem like SMIC is going to gain a lot of market share at 40 nanometer and 28 nm. So what would be your mid to long-term strategy here? Are you going to try to become a profitable, shareholder-friendly company, or is there a Chinese government strategy that would enable you to pursue leading-edge technology and remains to be a player in the leading edge? Donald, thank you for this good question. Definitely, our overall strategy is to become profitable. That does not mean that we will abandon our overall position in this foundry market. Our short-term strategy definitely is to increase our fab loading and leverage all the investments we have already made fully. This we can achieve through yield, quality, and service, and deliver on our commitment to our customers. We have seen some of these results in terms of the increase in the loading, both in the 8-inch as well as in the 12-inch fab. I think it is we need to first demonstrate this capability instead of really continuing to invest without fully leveraging the past investments. Our second strategy is to execute accurately on our 45 nanometer and 40 nanometer ramp. And this, we have shipped quite a few number of 45 pilots with our customers being very, very satisfied. We also have shipped a 45 nanometer initial production wafers by the end of last quarter. So customer and system qualification is ongoing, and our investment here definitely will be tailored to our customer demand. So we will keep our investment closely, how do I say it? Flexible. If there is a customer ramp-up expectations, definitely, I think we have the commitment to increase our investment here. So overall, these are the two important short-term strategies. We are executing these and with good results so far. I think we hope that this will bring us back to a position where we can become profitable and be, in the future, starting to increase the capital expenditure again. Does that answer your question? Just to follow up there. Is there any new supporting policies or plans from the Chinese government or your majority shareholders to facilitate the strategy you just commented? The reason I'm asking is if you look at the history of the foundry industry. There is a pretty clear precedent before. One is Chartered, which is more like on the leading edge, trying to maintain the R&D. Another would be companies like Hua Hong NEC or Tiberon, you probably are familiar with, are more technology-focused. But apparently, you can't do both. So I guess the government here plays a major role. Maybe you can give us some insight into what's new here from the government supporting that. We continue to get actually very strong support from both local as well as the central government in terms of our R&D effort. Just now, I think Gary Zeng had mentioned R&D grant. We definitely have projects to do new technology, and once we complete the technology and demonstrate its manufacturability, these grants will be given to us. Therefore, we feel that there is sufficient support from our general government policy here in China. How much would be the R&D grant per year going forward? Well, as I said, this is Gary Donald. As I said earlier, the government, the grants is not a fixed format to give you a fixed amount. As we go through the different projects, and it depends on your deliverable, and they will give you next grant and so on. That is the reason why we never be able to forecast how much we will receive. As I said earlier, How much was the In the last few How much was the grant last year? In the last few years, we have been able to receive from $35 million to $45 million, each year in, year out. Last year specifically is $46 million. Okay, great. Thank you. Thank you. Your next question comes from the line of Rick Xu from J.P. Morgan. Please ask your question. Yeah, hi. Good morning. I think first of all, congratulations to your 40 nanometer ramp-ups. That has started contributing to your top line. I think my question is, can you be a little bit more specific, how are you going to see the 40 nanometer ramp-up trend throughout the whole year in terms of revenue contribution, let's say from Q1 to Q4? Okay. I think at this moment, we are targeting our major ramp-up of the 40 nanometer on the second half of 2012. So during the first two quarters, our product is still going through qualification as well as get customers' system qualification as well. Is it safe for me to assume- Does that answer your question? Yeah. I'm just thinking, is it fair for us to assume maybe some high single-digit contribution in the second half of this year? Yes. By the fourth quarter, we hope to have around high single digit, 9%. Okay, excellent. Thank you. My second question is on your SG&A guidance for Q1, and it looks $96 million to $99 million look to be above the normal level. I think Gary explained this partially to do with the Shanghai 12-inch R&D facility start-up cost. My question is this going to be just a one-off, or it's going to last for several quarters? Well, first of all, the Shanghai 12-inch fab ramping up will be continuously. Right now, our Shanghai 12-inch fab has somewhere around 4,000 40, 45 nanometer capacity, and we expect to ramping it up all the way toward the end of year is somewhere around 9 to 10,000. With this increase, ramping up depreciation will be increased. If we keep this fab under the OPEX line, then definitely the OPEX will be going up significantly. However, if we bring this line up to above the growth margin, currently, we expect across the whole year, the OPEX expenses without this 12-inch fab will be quite stabilized. We don't expect it will be increased. Actually, we control it, will be very tight. Thank you. Okay. Thank you so much. Your next question comes from the line of Zliho Ng from BNP. Please ask your question. Hi, good morning, gentlemen. Just want to know if you have any plan to get into a silicon interposer production, that way to digest some of your 65 nanometer capacity. -organization, and we will not be going into production in a short time. I see. Okay. Also, very quickly, could you talk about the pricing environment right now for, let's say, 65 nanometer and 90 nm market? That would be helpful. Say that again, please. Oh, okay. Could you talk about the pricing environment right now for 65 nanometer? Oh, pricing environment. Actually, we think right now, our pricing is pretty competitive, but is stable. Our main thrust is to increase our 65/55 fab utilization. Okay. All right. Thank you very much. Your next question comes from the line of Daniel Heyler from Bank of America. Please ask your question. Oh, thank you. Just a couple of quick follow-ups for Dr. Tu. I wanted to focus on what the new management team is doing on a forward basis, not what's actually happened. I think on the first part, on the mature technology front. On your strategy there, as you roll this out, what is your profitability levels on the 8-inch, and is this power management contribution going to be accretive? I also wanted to understand more on the NAND, on the flash memory contribution, whether that actually enhances the profitability of the 8-inch fabs. Thank you. Okay. The embedded NVM of market segment that we are targeting will have a profitability that is above our normal average. As far as the Power Management IC, it will be depending on the customers. But in general, we are satisfied with its margin. Okay. What is driving this surge in power management? Are you seeing that its IDM outsourcing picking up? You talked about this pickup as well. Yeah. This is from fabless company. Excellent. Okay. On the advanced technology strategy, I wanted to understand the operational dynamics here. 40 nanometer ramping in Shanghai to 40, 45. Typically, one fab would have a multi-process fab technology, such that you can move wafer capacity around and operate it more efficiently. Will the Shanghai fab be able to do 65, and will it be able to do 28? If you just elaborate more. I know you have talked about ramping 40, 45 this year there. I am wondering what the longer-term technology strategy there is. Yes. Shanghai fab will be able to do 28 nm as well. There is no plan for Shanghai's 12-inch fab to do 65. Okay, then on the Beijing fab, maybe is that going to just remain at 65, or do you plan to migrate that forward to 40? When there are sufficient customer demand, Beijing fab is capable also to move to 45 as well as 28. Okay, great. Thanks. And just a very quick one for Gary Zeng. Could you tell us the contribution that memory is? Because you talked about that being a fairly strong business in the fourth quarter. So what's the contribution for the non-volatile, and where do you see that growing over the next two quarters? Thank you. Well, actually, our fourth quarter, we experienced some of our memory customer going very strong, especially for a local Chinese car market. We will not declare in that specific market percentage we have. But going forward, I believe, this specific customer should be able to take more market share in terms of application within the white brand market, especially for the China market, in a significant way. We expect we will be able to grow our lease application product market share with this customer significantly into the future. Just sorry, a little more few details, if I may. What was the revenue contribution in the fourth quarter, and where do you see it going? Also, maybe elaborate on what process node you're using to ramp this as well. Thank you. Well, again, we will not disclose in that detail, but that will be all contributed from the 65 nanometer. Okay, excellent. Thank you very much, Gary Zeng. Thank you. The next question comes from the line of Eric Chen from Daiwa. Please ask your question. Hello, good morning, Dr. Tu and En-Ling Feng. The couple of the information I would like to double-check with you. The first on the depreciation expensive, how many percent year-on-year growth for this year at your target? How about the capacity expansion? How many percent is year-on-year growth? In terms of the depreciation, as I say earlier, we will probably increase somewhere around $20 million-$30 million in depreciation expenses from 2011 to 2012, or you can say somewhere around 5%-7%. That will be very much in the depreciation side. Your other question is? Capacity growth for year 2012. Oh, capacity growth. How many percent? Right. Most of the capacity will be stayed very much like the last year. The only increase will be in the Shanghai 12-inch fab, which is from 4,000 to somewhere around 9,000 to 10,000. Can I say this, after factoring the Shanghai fabric expansion at the 40/45 nanometer process, we probably can forecast the total capacity growth is like the low single digit year-on-year growth. Well, somewhere around. It will be a little bit higher than the low single digit, I would say in the mid-single digit. Mid-single digit. Thank you. In terms of the China, the fabless client, I remember at the early stage of the conference call, you highlighted the revenue percentage was and how many percent year-on-year growth. Would you mind highlighting again? Our China revenue growth is 15%, from 2010 to 2011, and it contributed 30.6% of our total 2011 revenue. We would expect this growth pace will be continued into 2012. Okay. What kind of revenue percentage contribution you believe for year 2012? For China market? Yes. From the China client. I think that probably- Oh, from the China clients. Pretty much. Right. Well, at this point of time, I would say this is really too early to declare this number because, for 2012, especially for second half, there are still a lot of variable. For our best to get, as we usually do the biggest market share in our China market, and definitely we get a majority of the share from our China customer. Thank you. Okay. You talk about the market share, so how many percent the market share you believe you take for those China, the IC maker, let's say the fabless maker, you are approaching, and for their foundry loading, how many percent you think? At this point of time, I cannot disclose or comment on the 2012 specific number yet. Okay. How about for year 2011, for all of the China, the IC design house, for their foundry loading, how many percent you believe you take over from their foundry source? In the past, we calculate that, and we seem so we can occupy 50%, but specifically for 2011, I would expect we should be able to get very much the same percentage. Okay. Thank you. Last question. For your China client, it is very clear SMIC, it is a favor for them to do the cost down. My question is, what kind of strength you believe you I mean, what kind of the adding the value or the adding strength you think you will have for this year to maintain or increase the market share, and what kind of application from your China client will be the main business for the SMIC? Okay. I think, to gain the China customers, I think we have to identify quite a few customers that can utilize our technology very, how do I say? A very good match. For example, we are working with our customers in the smart card area and in the CIS area, and these are all areas we feel that we can have significant presence and a significant increase in the market share in China as well. Does that answer your question? Okay. How about this way? What kind of application is the majority of the business from your China client? Application, I mean the sensor IC or say the- Okay. Set-top box IC. Mm-hmm. Okay. I think our customers are from all sectors, but we are seeing strong growth in the mobile communication, as well as we are seeing some early sign of growth in the tablet market. I see. That's mainly at the 55 nanometer process, I believe, and then 40 nanometer process, right? That's correct. Mm-hmm. Okay. Thank you, Dr. Chu. Thank you, Andy. You're welcome. Thank you. This is the end of the Q&A session. I would like to hand the call back to CEO, Dr. Chu, for the closing remarks. In closing, I would like to take this opportunity to thank all of our shareholder, customers, employees, and the supplier for their trust and support. We also thank the analysts who participated today for their questions and comments. We'll see you next quarter. Bye-bye. Bye-bye. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.