Welcome to the Semiconductor Manufacturing International Corporation's first quarter 2013 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 a 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 you to Mr. En-Ling Feng, Senior Director of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's first quarter 2013 earnings conference call. For today's call, our CEO, Dr. T.Y. Chiu, will first provide some business 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 risk 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 15, 2013. I will now turn the call over to our CEO, Dr. T.Y. Chiu, for the opening remarks. T.Y.
Thank you, En- Ling. Good morning and good evening to everyone. Thank you for joining us for our first quarter 2013 earnings webcast. I am very pleased to report that SMIC has again achieved another record high revenue of $501.6 million in the first quarter of 2013, representing year-over-year growth of 50.8%. Furthermore, gross margin improved to 20.4% in first quarter 2013, compared to 12% in the first quarter 2012. Income attributable to SMIC was $40.6 million in first quarter 2013, compared to a loss of $42.8 million in first quarter last year. Utilization improved to 89% in first quarter, compared to 74.1% last year. Despite normal low seasons of fourth quarter and first quarter, we achieved five consecutive quarters of revenue growth and four consecutive quarters of net profit.
Now in detail, revenue growth for the first quarter was mainly driven by increased sale from 45/40 and in part from 0.18 micron process technology. Specifically, 40/45 revenue contribution more than doubled to 6.4%, compared to 2.6% of wafer revenue in the fourth quarter of 2012. This increase was mainly driven by higher demand for mobile product from both U.S. and the Chinese customers. Customers continue to express strong demand for our 45/40 services, and we are confident that our 45/40 capability will continue to drive our revenue in 2013. We see continued momentum as new tape-out continue to increase in Q2. In addition, revenue from our China customer grow 14.5% sequentially and 79.1% year-over-year, contributing 38.6% of total revenue in the first quarter of 2013, an all-time high.
According to Gartner, the overall China semiconductor market is forecast to grow 12.1% in 2013, while worldwide semiconductor continue to grow at 4.5%. Under this backdrop, we see that the recent growth within China and some other regions have been largely driven by the growth of smartphone and tablet demand in China. According to Gartner again, 672 million smartphone units are expected to be produced in China in 2013. They estimate that this unit production will rise to 1.3 billion unit in 2017, compared to 421 million in 2012. Meanwhile, 187 million tablets are forecasted to be produced in China in 2013, which is estimated to rise to 407 million in 2017, compared to 134 million into last year. Likewise, we are currently witnessing strong interest from our customers for various technology process as they address these growing markets.
Now let me address the progress of our differentiation strategy. Our PMIC, EEPROM, and CIS development are making progress very well. We have new PMIC customers ramping up, contributing to the healthy demand of our 0.18 micron process. In terms of our EEPROM, encouragingly, two of our customers recently had their bank card solution qualified by China UnionPay. We target to see meaningful revenue growth from our differentiated application in 2014. Now I want to continue to comment on our technology. We were very encouraged that SMIC was recently selected as 2012 to 2013 constituent of the Ocean Tomo 300 Patent Index, which is based on the value intellectual property, value of intellectual property, and represents a diversified portfolio of 300 companies that own the most valuable patents relative to their book value.
In addition, China's State Intellectual Property Office, SIPO, granted 530 invention patents to SMIC in 2012, an increase of over 45% from the previous year. According to data released by SIPO, SMIC ranked fifth among all domestic patent generators in 2012, compared to ninth place ranking in 2011. We will continue to focus on developing innovative patents in order to ensure adequate legal protections to maintain our industry leadership, while bringing greater value to our customer and investors. Along the same line, our 28 nano advanced development for both High-k /Metal-G ate and polysilicon process continue to be on track and are targeted to be ready by the fourth quarter of 2013 for customer design.
Before I move on to the overall outlook for 2013, I want to share with you that on March 25th, we announced that SMIC had ceased all responsibility in managing and operating the 300 millimeter wafer fab in Wuhan, owned by Wuhan Xinxin. When we exclude wafer shipment directly from Wuhan Xinxin, SMIC revenue actually grew 8% in first quarter 2013, compared to fourth quarter 2012. This decision is in line with our strategic direction for sustainable growth and profitability, as we focus our effort on expanding SMIC's existing sites. As for the overall outlook in 2013, we currently expect Q2 to continue to grow 3%-5% sequentially, which means SMIC would achieve six consecutive quarters of growth. Our growth driver in 2013 will continue to be 40, 45 process, servicing primarily mobile-related applications as well as the strong demand from the China region.
As a result, we revised our plan to expand our 12-inch capacity in Shanghai for 40, 45 to reach 15,000 12-inch wafers per month at the end of this year from the previous plan of 12,000 wafers per month. In conclusion, I would like to reiterate that we will continue to focus on sustained profitability, growth, and the shareholder value. I would like to thank all employees for delivering another excellent quarters, our shareholders, customers and partners for their continued trust and support. I will now hand the call to Gareth for overall business and financial commentaries.
Thank you, T.Y., and thank you everyone for joining us today. I will now take a few moments to summarize our first quarter 2013 financial results and provide our second quarter 2013 guidance. You may also refer to our quarterly financial presentation on our website. Please note that all currency figures are in U.S. dollars unless otherwise stated. Also, please be aware that the company has started to prepare the financial statements in accordance with IFRS in order to improve comparability with peers within the semiconductor industry and reduce the cost of financial reporting under different accounting framework. Now, to highlight our first quarter 2013. We are pleased to report another strong quarter. Again, in first quarter of 2013, we achieved record revenue of $501.6 million, our fourth consecutive quarter of record-high revenue, representing an increase of 50.8% year-over-year, an increase of 3.2% quarter-over-quarter.
Revenue from China-based customers contributed 38.6% of overall revenue in first quarter of 2013, compared to 32.5% in the first quarter of 2012 and 34.8% in the fourth quarter of 2012. Gross margin was 20.4% in the first quarter of 2013 compared to 12% in the first quarter of 2012 and 19.9% in fourth quarter of 2012. Net income attributable to SMIC was $40.6 million, compared to a net loss of $42.8 million in the first quarter of 2012 and net income of $46.6 million in the fourth quarter of 2012.
Now, looking into detail of our income statement. Revenue growth in the first quarter of 2013 exceeded our original guidance, mainly due to the increase in 45 nano wafer shipments. Wafer revenue from Wuhan Xinxin was $29.2 million in the first quarter of 2013 compared to $40.5 million in the fourth quarter of 2012.
As we have ceased the management and operational responsibilities at Wuhan Xinxin at the end of March, wafer revenue from Wuhan Xinxin is expected to diminish over the course of the year. Excluding wafer revenue from Wuhan Xinxin for both quarters, our revenue increased 8% quarter-over-quarter. Gross margin was guided 17.5%-19.5% and resulted in 20.4% in first quarter 2013 compared to 19.9% in the fourth quarter of 2012. Primarily due to decreased shipments from Wuhan Xinxin, we had a lower gross margin. Total expenses from continued operations in first quarter 2013 were $71.1 million, which was offset by R&D grants of $10.9 million. Meanwhile, total expenses from continued operations in fourth quarter of 2012 were $64.7 million, offset by R&D grants of $10.1 million. R&D expenses decreased mainly due to lower usage of wafer and masks for our R&D activities.
G&A expenses decreased to $39.8 million from $29.4 million. Sorry, G&A expenses increased to $39.8 million from $29.4 million, mainly due to employee bonus accrual and recovery of bad debt in fourth quarter of 2012. The increase in employee bonus accrual is a component of SMIC's employee retention program for 2013. The bonus accrual is contingent upon the company's full-year overall profitability. Looking at the other income and loss, finance cost totaled $10.9 million in first quarter 2013, which includes interest expense and minority interest accretion. Other expenses were $1.4 million in first quarter 2013 compared to income of $2.1 million in the fourth quarter of 2012, mainly due to the decrease of school revenue and increase of living quarter expenses. Other gains in first quarter 2013 totaled $22.4 million, of which $20.3 million was from the sell-off SMIC living quarter units.
Profit before tax was $43 million in first quarter 2013 compared to $49.1 million in the previous quarter. Income tax expense was $2.5 million in first quarter 2013 compared to $2.7 million in fourth quarter of 2012. Both of which were mainly comprised of Land Appreciation Tax related to the sale of SMIC living quarter units. Fourth quarter Land Appreciation Tax was restated downwards. Income attributable to SMIC was $40.6 million in first quarter 2013, compared to $46.6 million in the fourth quarter of 2012. Moving to balance sheet. At the end of first quarter 2013, our debt-to-equity ratio was 41.3%, compared to 48.2% in the fourth quarter of 2012. The ratio declined as long-term debt decreased $99.6 million, and short-term borrowing decreased by $38.4 million, compared to the end of fourth quarter 2012.
In terms of cash flow, we generated $154.6 million of cash from operating activities, compared to $183.8 million in the fourth quarter of 2012. Cash and bank balances, together with restricted cash at the end of first quarter 2013 decreased to $478 million from $576.1 million in the previous quarter, mainly because we used the cash on hand to retire some of our bank borrowing. To examine our revenue by application. The communication sectors were again our biggest contributor to the revenue this quarter. Revenue from this sector increased to $237.3 million, representing a sequential growth of 2.9%. This growth is mainly from an increase in handset-related products. Revenue from the consumer segment grew 3% quarter-over-quarter, contributing $213.2 million, mainly from gaming devices, set-top box, and smart cards. Geographically, revenue from North America declined 2.5% sequentially, contributing 51.4% of total revenue.
Revenue from China grew 14.5%, contributing 38.6% of total revenue. Eurasia declined 4.4%, contributing 10% of our total revenue. In terms of technology, revenue from 45/40 nm more than doubled sequentially, contributing 6.4% of revenue in first quarter 2013. Revenue from 65/55 nm and 90 nm declined 7.4%, mainly as a result of the decline of wafer revenue from Wuhan Xinxin. Meanwhile, 0.13 micron above revenue grew 4.7%, with strength from CIS and PMIC applications. In terms of our overall capacity, total monthly capacity at the end of the first quarter was 219.6 thousand wafers, compared to 219.3 thousand wafers. The change was mainly due to product mix change in our Tianjin Fab and improved efficiency in our Shanghai and Beijing fabs. The overall utilization was 89% in first quarter 2013, compared to 90.5% in the fourth quarter of 2012.
The utilization decrease was mainly due to lower utilization of our Beijing Fab. We revised our 2013 CapEx estimate for foundry operation to be approximately $675 million from the previous estimate of $600 million. The additional CapEx is to further expand our Shanghai 12-inch fab to 15,000 wafers per month by end of 2013 to meet the increased customer demand for 45/40nm capacity. Looking ahead at second quarter 2013, we are guiding revenue to increase 3%-5% quarter-over-quarter. Gross margin is expected to range from 20%-22%. Total expenses from continuing operation are expected to range from $85 million - $88 million, excluding foreign exchange in R&D grants. I will now hand the call back to En-Ling Feng for a Q&A session of this call.
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, two at the most. Thank you. Operator, please assist.
Ladies and gentlemen, if you do wish to ask a question today, please press star followed by one on your telephone keypad and wait for your name to be announced. Your first question today comes to the line of Jimmy Huang from Credit Suisse. Jimmy, please go ahead.
Okay. Yes, this is Randy Abrams, Credit Suisse. The first question on the Shanghai Fab, where you are pulling in for this year. I actually want to ask more on, as you look to drive growth continuing for next year, if you could talk about where the next headroom on Fab capacity is, like how far you can expand Shanghai or what other Fab options you have to continue to grow 40 nm next year. Maybe the follow-on for that is the 65 nm coming down, if there is any opposite issue on 65 where you might get a little bit of excess capacity and perhaps could migrate lines to 40 if that is the case?
All right. I would like to say that our Shanghai Fab can still grow up to 22,000 wafer per month. As we see the customer's demand situation next year, we will continue to expand the Shanghai operation. As far as the additional 40 nanos capacity, as we set up Beijing Fab, the initial capacity will be able to. Certainly, we will set it up for 28 nm, but it will address the urgent 40 nano customer ramp as well. As we look into second quarter, our 65 nm loading has been very robust. We do not see that there is a persistent reduction in the 65 nano, 55 nano loading. That, to us, we believe is not an issue in the long term.
Hey, Randy, I just want to add to T.Y.'s comment.
Jimmy.
No, Randy.
It's Randy.
Randy, yeah. The decline in 65 nm in Q1 is mainly because of the lower shipment from Wuhan.
Okay. Thanks for the clarification insights on that. The second question, I just wanted to talk about a few of the cost items, because there's been some volatility on the G&A, R&D, and I guess if you could go into how you're thinking about those categories as we move through this year. On the other, a couple of the other lines, depreciation moved higher, how you're thinking about depreciation. One other item was the one-time property benefit, if there's any continued benefits or that's a one-time $20 million incremental benefit you got?
Yes, Randy, let me address your question point by point. First of all, in terms of the R&D expenses, if you look at our Q1 results, the R&D expenses, excluding R&D grant, is about 6.8% of our revenue. As we're going to invest more R&D resources over the course of this year for advanced technology as well as for our differentiated technology, we're going to see some uptick in this percentage by about 2 percentage point by the end of this year. So, you'll probably see about, go to about 8.8%. For the other categories in OpEx, for G&A and S&M expenses, they'll pretty much remain constant. In terms of the depreciation, actually the overall depreciation for Q2 will be flat compared to Q1.
But as we ramp up the production in the 12-inch fab in Shanghai, you will see some uptick in Q3 and Q4 by about 5 million per quarter.
Okay.
And your last question is on the property sales. We could see some more revenue from that property disposal in Q2, but that will be the end of it, and we are not going to see. We are not planning to dispose more property in the second half this year.
Okay. And maybe if I could just clarify real quick, the G&A S&M for remaining constant, is that constant as percent of sales or constant dollar amount off of first quarter?
Is that, okay. Depreciation, is that $5 million higher in third quarter and then another $5 million higher in fourth quarter? Or it just steps up and then stays flat in fourth quarter?
On the G&A and the sales and marketing expenses, I am looking at it as a percentage of revenue. In terms of the depreciation, the step-up, you will see a step-up in Q3 and another step-up in Q4. Yeah.
Okay. Thank you.
Your next question today comes to the line of Bill Lu from Morgan Stanley. Bill, please go ahead.
Yeah. Hi, good morning. I'm sorry, I joined the call a little bit late, so apologies if you already talked about this. 40 nm, can you give us some guidance as for how big that could be as percentage of revenues by the end of the year?
Sorry, can you repeat your question again?
Yeah. 40 nm revenue growth for the rest of this year.
Yeah. I think by the end of Q4, we're looking at the mid-teen contribution to our overall revenue from that node.
Is that mainly coming from customers you have today that are ramping, or is this a broadening out of the customer base?
Mainly from the existing customer, but with more products.
Let me add a bit more to that. We are actually getting a couple more very strong new customers coming in with quite a few new tape-out.
Okay, great. Thanks very much. That's all I have.
Thank you, Bill.
Your next question today comes to the line of Dan Heyler from Bank of America Merrill Lynch. Dan, please go ahead.
Thanks. Good morning, guys. Dan Heyler here from Merrill. Two questions. The first one I wanted to ask you was relating to your expansion of 28 nm and how that benefits from the R&D grants. My understanding is the incentive for the grants relate to products for the China market in addition to technology. Maybe elaborate on the 28. If that ramps, would you likely see an uptick in grants as it relates to that node going forward in 2014?
Could you repeat the question again?
The re-
Yeah. 28 nm. What kind of grants are you expecting for that? Just in qualitative terms, because I presume you are seeing nice pickup in 40 nm that is driven by the China products. These grants are particularly higher for domestic products, right, that are relating to wireless, and R&D grants relate to domestic products, yes? 20 nm, can you support that expansion and technology with meaningful grants coming from China? Because a lot of this, I presume, is driven by domestic demand.
Yes. Okay. Indeed, I think the R&D contract we have will be a steady part of our 28 nano investments. 28 ramp-up is planned mainly for our Beijing second fab, B2 fab. However, in our Shanghai fab, we already have got about anything beyond our 10,000 capacity in Shanghai is 28 ready. We have a significant capacity in Shanghai able to address the 28 nano technology when there is a customer demand. Our customer interest come from across the board, not only just from the China market, but also from our international market. This is not only exclusive for our domestic customers.
Okay. Yeah. What I was getting at is how this is going to be paid for really was the essence of my question, and would you expect the grants to be higher next year, for instance, relative to this year?
In the relative terms, I think it will be more or less steady. Internally, we are fully capable of funding this increased R&D expenditure.
Okay, great. Thank you. The second question relates more to, as you're looking at your growth strategy, you've done very well on your specialty process technology. I'm wondering how much upside do you have to your existing facilities as you continue to drive efficiencies across your existing plants? Can we think when you say 89%, 90% utilization, is 100% really full utilization, or are you thinking that perhaps you could see maybe 105% or 110%, when your competitor sometimes gets more efficiency than they report? TSMC sometimes can be 110% utilization. I'm just wondering, is your 90% really 90%, or could you see upside to the 100% utilization if demand was stronger than expected into the third quarter?
Okay. If you checked in the past, indeed, SMIC had a loading close up to 100%. Indeed, I think we still have some room to ramp up our wafer out. In addition, we constantly are looking at our equipment bottleneck, and by adding some equipment judiciously, we are able to, again, increase our capacity somewhat. In addition, now we are constantly looking at opportunities to actually start the new Shenzhen fab. We have already got an 8-inch fab facilitized in Shenzhen. When we find the right opportunity and right equipment mix, we will start that particular facility to address the very strong demand from the mature technology.
Thank you.
Your next question today comes from the line of Szeho Ng from BNP. Szeho, please go ahead.
Hi. Good morning, gentlemen. With regard to the expected bonus accrual at our operating expense line, how should we model for the future quarters? I know that is contingent on the company's full-year overall profitability.
Yes. This bonus is a reserve at this point in time. Actually, the payout of this bonus will depend on the company overall achieving a certain level of profitability for the whole year. As I mentioned, we expect the G&A expenses actually will remain flat as a percentage of revenue over the course of this year. So I think you can model on that basis.
Oh, okay, got you. For the Wuhan wafer revenue, when should we expect the contribution to go down to zero?
That will happen over the course of this year, but you will see a more significant drop starting from Q3 onwards.
Oh, okay. Got you. Okay. Thank you very much. Good quarter.
Your next question today comes from the line of Steven Pelayo from HSBC. Steven, please go ahead.
Yeah. I really appreciate you guys giving guidance on kind of a continuing operations basis. Yet every quarter, it is another $10 million of R&D land sale here, so it is very difficult to try to model this. I guess first question is, movement in Wuhan. The first question is, you talked about how your revenues would have been up 8% excluding Wuhan. That is actually very impressive to me. What would gross margins have been excluding Wuhan, would be question number one. Question number two is then, same kind of thing on an ongoing basis. If you did not have the R&D grants, if you did not have the land sales, can you talk a little bit about what kind of op margins and net margins you would have had on more of a continuous operations basis?
We do not actually disclose separately the gross margin excluding Wuhan shipments. But as I understand, the shipment from Wuhan carry a significantly lower margin than our core operations. Obviously, you can figure out that the gross margin will be higher without Wuhan. Yeah. In terms of the core operation, as I mentioned, our living quarter sales, basically, we are going to have some more booking in Q2, and that should fade away after Q2. Our R&D grants, we have about $10 million this year. Conservatively, you can forecast maybe about $25 million- $30 million for this year. Hopefully, that would help in your modeling.
Do the land sales actually, the contribution increase in Q2? I know it is at the final amount in Q2, but what is the dollar level?
It will be lower than Q1.
Lower than Q1.
It's going to be lower than Q1. Yeah.
Okay. Last question is really on 40 nm. You had talked before about it. Obviously, it's a drag on gross margins right now, but each quarter as it ramps, it becomes less and less of a drag. Can you help us understand what kind of gross margins or kind of relative improvements you see in 40 nm as you go to 10,000 wafers a month of revenue and as you exit the year at 15,000 of capacity, even if only 12 or 13 or something are recognized for revenue? Help us understand how much 40 nm margins are going to improve as you guys ramp up volume.
Okay. As a matter of fact, you recognize that actually we are guiding a high gross margin for the company for Q2, and that is mainly attributable to the improved gross margin from our 40, 45 nm ramp-up. As we continue to ramp up the production there, the gross margin for the company will continue to improve. Hopefully, we are still targeting somewhere between 22%-25% towards the end of this year.
22- 25 by the end of the year. Excellent. If I could just sneak one final quick one, then I'll get back in the queue. Beijing Fab 4 is a big fab, 65/55. Are there any tools that are capable there to be 4X capable? We're capacity constrained right now. Can we do any upgrades there, or do we have to wait for Beijing Fab 2, or we have to just continue Shanghai up to its 22,000?
That's a great question. Indeed, some of our Beijing Fab 1 equipment is indeed capable for 40 nm. We are considering to leverage some of that equipment for building a mini-line in B1. That decision is still being studied within the company, although at a very intense level.
Okay, great. I'll get back to you.
That particular-
Oh, sorry.
That particular approach will also reduce the investment intensity. I just want to point out the additional investment we have done this year for the additional capacity is at a very much lower investment intensity as compared to normal capacity buildup.
Excellent. Thank you.
Your next question today comes from the line of Roy Chen from SWS Research. Roy, please go ahead.
Thanks. Thank you, T.Y., Gareth, and En-Ling for taking my questions. My first question comes that could you elaborate more on the company's strategy for growth in 2014? As we know, the 28 nm revenue is expected to start from 2015.
Okay. Indeed. Our strategy in 2014, our number one strategy is to maintain our sustainable profitability. You will see still increased revenue from the having a fully ramped Shanghai Fab 8, having that 40 nm full loading. Secondly, indeed that we will have capacity in Beijing Fab 2, that will be able to address some of the 40 nm and perhaps some of the 28 nano customers as well. The third revenue increase is our differentiation technology, and we believe that by the later half of 2014, some of our new technology that we are working on will be kicking in to generate a higher revenue for SMIC.
Great. Thanks. My second question comes, could you provide a more detailed expectation for each business segment's growth by geography this year? Such sort of like a year-over-year growth for U.S. region and China region. Thanks.
We expect that across the board there will be a significant growth. But still with China growing at a higher rate. The industry has a forecast for foundry growth somewhere between 10%-12%, according to various sources. We believe that we are able to target a general annual growth above this industry growth.
Great. Thank you.
Your next question today comes from the line of Miles Xie from BOCOM. Miles, please go ahead.
Okay, good morning. Just one question on the PMIC part. You mentioned you have a new customer coming from the PMIC. Can you talk a little bit more on the new customer, and what the growth of this business, I mean, the Q-on-Q growth? If we exclude the new customer, what the growth will be? We also noticed from the fact that Qualcomm and MTK said they are going to simplify their power management unit, so that will speed up the processor. I just want to know how this will impact the business of SMIC?
Okay. First of all, we have got new customers in PMIC from both the mobile phone, smartphone area as well as the pad applications area. We are seeing the strong PMIC growth from various customers. I cannot add additional comment to your second questions in the new simplified PMIC solutions. The only thing I can say is that we are working very closely with all of our customers.
Hello, Miles.
Your next question.
Does that answer your question?
Your next question comes from the line of Eric Chen from Daiwa. Eric, please go ahead.
Hi, gentlemen. My first question regarding the 40 nm process. You just mentioned the revenue contribution, and by end of this year from the China client will reach the meeting of total revenue. In that case, I'm wondering how big the capacity will be at the year-end, and in term of the capacity, the percentage, how many percent from the Shanghai Fab and how many percent from the Beijing Fab?
Yeah. Just now we mentioned that we're targeting to reach about mid-teen revenue contribution from the 40, 45 node by Q4 of 2013. That would be all coming from our Shanghai Fab. Right now, as mentioned, we have upped the CapEx this year, and we target to bring that fab to about 15,000 capacity by end of this year.
Okay. That mean the capacity will jump to 37,000 from the 22 ,000 now at the end of this year, right?
What I say is that for that 12-inch fab in Shanghai, we target to reach the yield capacity of 15,000 wafers per month.
Okay, how many the total capacity, I am sorry, I confused. How many total capacity for the 40 nm process, let's say in Q4?
That would be all. That would be the only fab that we are going to produce at 40, 45 nano for 2013.
Okay. For the 40 nm process, the revenue percentage, and how many, the roughly idea, will come from the non-China client, let's say at the year-end, roughly?
Okay. Let me comment on that. I think, by the year-end, we will have maybe one third of our 40 nano capacity coming from our international customers, whereas two third of our capacity will be from the domestic demand. Roughly.
Okay. Thank you. One more. You talk about 65 nm process, the capacity will switch to the 40, you also talk about the 28. I am sorry to say that I probably missed, I probably lost. Could you give us the clear idea, in term of Shanghai Fab, Beijing Fab, and how many capacity, you think that in one year and where locate at the 40, 45 nm process and the 28 nm process, based on the current CapEx plan. Thank you.
Okay. Sorry, I apologize. Maybe I was not very clear in talking about our 65 and 40. Some of our Beijing Fab 1's, 65 equipments are capable of doing 40 nano technology. What we are saying is that there is a possibility of setting up a 40 nano capacity up in Beijing with leveraging some of the 65, 55 equipments. That has not happened. We are doing an intensive study to see how we can most optimally doing this kind of investments. At this point of time, that has not happened. 28 nm, our Beijing Fab 2, B2 Fab, is intended mainly to do 28 nm production. However, in our plan, half of our Shanghai Fab will be 28 nano capable. It is half of our Shanghai Fab 8 capacity can be switched to entertain a customer demand in the 28 nano. Is that clear?
Okay.
The Shanghai Fab does not need additional investment, in order to entertain some of the startup for the 28 ramp up.
I see. How many the capacity go for the 28, and how many capacity go for the 40 nm process, let us say end of the year-end, and let us say that in one years, let us say probably the end of next year, based on your plan?
Okay.
Let me say that, if we do not do any additional capacity expansion in Shanghai. In this scenario, and I am not saying that we will not, but I want to make this a more simple scenario. Then of the 15,000 wafers that has been set up by the end of this year, about half of it will be 28, ready to produce 28 production. Okay. But that will depend on the customer's demand situation.
I see. Okay. That's for 28. Okay. Thank you. That's very helpful. Thank you, Dr. Chiu.
Thank you.
Your next question today comes from the line of Dan Heyler from Bank of America Merrill Lynch. Dan, please go ahead.
Yeah. Hi. Thanks. Just a couple quick follow-ups. On your previous comments on my question regarding capacity expansion on the mature specialty process, you mentioned the potential Shenzhen fab, 8-inch fab. Could you elaborate on when we'd see that and what kind of products you'd expect to see that, and how big is that facility to help drive 2014 growth?
Dan, we are still working on the plan for our Shenzhen fab. I think we have studied different options and scenario, and we have not finalized the plan yet. We will update the market as we have a firm plan to move forward with the Shenzhen fab.
Okay, great. As it relates to the specialty process technology, you've seen nice improvement there. How much of that market share do you think you're taking is relating to, say, tier one foundries? Do you think you're taking share or have a competitive advantage over tier two foundries? Is there any IDM element here to grow this business? I just wanted to understand your competitive dynamics going forward. Thanks.
Okay. In the past couple of years that we have been growing, I mean, last year and this year, we are targeting to grow faster than the industry average. Indeed, that means that we are taking shares. We are seeing competitors everywhere, and every one of our competitors are very capable and very strong. At this moment, it's hard for me to comment whose share we are taking away. We are working diligently to try to work with our customers to attract their business. That's the best I can say.
Well, thanks. Maybe just a little bit of follow-up clarification is, I wanted to see how sticky that business is. I know that it can be price competitive. Do you need to price aggressively to get that business, or is there differentiation that you're offering? I guess, once you win the business, how easy is it to switch between the foundries?
Okay. I think if you could observe our pricing ASP, I think SMIC's ASP has been staying relatively steady over the last few quarters, and that reflects our improved quality and service level. In addition, we're working very closely with our customers to tailor our technology to their demand. Indeed, we have been spending a significant effort to modify our process to meet some specific need for each of these applications. We believe that through our improved quality and service, that our customer would stay with us and would be very satisfied with the SMIC's, not just because of wafer pricing. We work hard to get their business.
Excellent. Well, congratulations on the great turnaround, and thanks for answering the questions.
Thank you.
Ladies and gentlemen, that concludes today's question -and -answer session. 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 customers, shareholders, and especially our employees and suppliers for their trust and support as always. Thank you.
Bye-bye.
This is the end of SMIC's first quarter earnings conference call. We thank you for joining us today.