Welcome to the Semiconductor Manufacturing International Corporation's first quarter 2014 webcast conference call. Today's conference call is chaired by Dr. Tzu-Yin Chiu, Chief Executive Officer, Dr. Gao Yonggang, Chief Financial Officer, Mr. Gareth Kung, Executive Vice President of Finance and Company Secretary, and Mr. En-Ling Feng, Senior Director of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet as 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.smic.com. Webcast playback will also be available approximately one hour after the event at www.smic.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 2014 earnings webcast conference call. For today's call, our CEO, Dr. Tzu-Yin Chiu, will provide some general remarks first. Afterward, CFO, Dr. Gao Yonggang, will highlight our financial performance and give next quarter's guidance. Then our Executive VP of Finance and Company Secretary, Mr. Gareth Kung, will give the detailed financial commentary. This will then 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.smic.com under Investor Relations in the Events and Presentations section. Before I turn the call over to Dr. Tzu-Yin Chiu, let me remind you that the presentation we will be making today includes forward-looking statements.
These statements and other comments are not guarantees of future performance, but they represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our Form 20-F filed with the United States Securities and Exchange Commission on April 14, 2014. Also, during the call, we will make reference to financial measures that do not conform to Generally Accepted Accounting Principles, GAAP. This information may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non-GAAP numbers that we will be discussing. Please note that all currency figures are in USD unless otherwise stated.
I will now turn the call over to our CEO, Dr. Tzu-Yin Chiu, for the opening remarks.
Thank you, En-Ling. Greetings to everyone. Today, I would like to address this quarter's performance, this year's plan, and our future outlook. To begin, we are excited to see that our overall profitability has improved despite hitting a seasonal trough in the first quarter, which is our eighth consecutive profitable quarter. Even with utilization and revenue down, all our measures of profitability were improved compared to Q4 last year. When comparing Q1 2014 to Q4 2013, gross margin increased 2.4 percentage points. Profit from operations more than tripled. Profit attributable to SMIC group, 38%. Meanwhile, our capital structure also improved as our debt-to-equity ratio decreased 6.7 percentage points. We have gone through up seasons, and we have gone through down seasons, and SMIC has demonstrated the ability to maintain profitability throughout. We continue to emphasize the priority of sustained profitability and carefully planned growth.
Overall, we are optimistic about 2014 as we prepare our capacity and technology for many new and exciting opportunities. In terms of 28 nanometer, our High-k metal gate and polysilicon process are accommodating commercial IP and customer products verification through our MPW stage. We are happy to announce that we have received our first tape out from one of our customers. We have received first product tape out from one of our customers, and we continue to target production for 28 nanometer by the end of 2014, with ramp-up and revenue generation expected in 2015. We believe our progress on 28 nanometer is in line with some of our customers targeting to capture the LTE handset IC market in China. Our 28 nanometer technology is now also extending to RF applications.
Our 40, 45 revenue decreased in the first quarter, but we believe we are seeing the beginning of a recovery in the second quarter. Meanwhile, we are seeing a strong new tape out and new 40 nanometer products for Wi-Fi, Bluetooth, smartphone, tablets, DTV, and other new tape out continue. We expect a number of such products to enter production this year. This will enrich the product portfolio in our 40 nanometer offering, and the expansion of product in customers will reduce the volatility in the future. We continue to target overall mid-teen percentage revenue contribution from 40 nanometer this year. When looking at our differentiated products, SMIC has been experiencing a very strong demand for 8 in production capacity. We have made advancements in new feature offering on special technologies.
To highlight recent achievements, we have made good progress in fingerprint sensor technology and the CMOS image technology, which are both now in production. Power management IC also continue to see large demand from new and existing customers. PMIC, CIS, and our non-volatile memory technology now accounts for more than one third of our wafer revenue and have a compounded annual growth rate above 40% in the past four years. To respond to the strong 8-in customer demand, we have been pushing up the capacity of our existing facilities and launching our Shenzhen fab. For our existing fab this year, our plan is to expand our Shanghai 8-in fab from current 94,000 wafer per month to 96,000 wafer per month, and our Tianjin 8-in fab from 37,000 per month - 39,000 per month.
We are also excited to announce that we have secured sufficient used equipment for our Shenzhen fab, and we target 10,000 wafer per month capacity installed in Shenzhen by the end of this year to be ready for production in 2015. Also this year, our new Beijing majority-owned subsidiary also plan to install 5,000 - 6,000 wafers per month capacity by the end of this year. We continue to have a positive outlook on China semiconductor market. Situated in the world's largest consumer ICs, SMIC's position in China allow us to benefit from China's policy, which encourages the growth of Chinese domestic IC industry. With the launch of LTE in China, SMIC is working with customers to provide ICs required for LTE handsets. As China's bank card adopts IC solutions, we are collaborating with China's design house to capture this new market opportunity.
Revenues from China now accounts for more than 40% of our total revenue. To conclude my remarks, the first quarter was a low quarter due to seasonality and inventory correction. However, we have improved our profitability, and SMIC has demonstrated eight quarters of continuous profit over high and low seasons. As is reflected in our guidance, we believe we are positioned for a robust recovery in the second quarter and are optimistic about the second half of this year. We continue to have confidence in our strategy to capture growth opportunity in China. We will work diligently with our new and existing customers to capture opportunity in 2014 and onwards to build value for all our stakeholders. Thank you for your time, and I will hand over the call to Gao Yonggang for financial highlights and the Q2 guidance.
Thank you, Tzu-Yin. Greetings to all our listeners. I will now highlight our first quarter results and second quarter guidance. Revenue was $451.1 million in 1Q 14, a decrease of 8.3% quarter-over-quarter, and a decrease of 6.7% quarter-over-quarter when compared to the non-GAAP revenue, excluding wafer shipments from Wuhan Xinxin. Gross margin was 21.3% in 1Q 14, compared to 18.9% in 4Q 13, and compared to the non-GAAP gross margin, excluding wafer shipments from Wuhan Xinxin of 19.2% in 4Q 13. Profit for the period attributable to SMIC was $20.3 million in 1Q 14, compared to the $14.7 million in 4Q 13. Looking ahead into the second quarter of 2014, revenue is expected to increase 12%-15% quarter-over-quarter. Gross margin is expected to range from 22%-24%.
Non-GAAP operating expense, excluding the effect of employee bonus accrual, funding of R&D contracts from the government, and gain from the disposal of living quarters, are expected to range from $89 million-$93 million. I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Yonggang, and thank you everyone for joining us today. I will now comment on the details of our financial results. On the income statement, revenue decreased in the first quarter of 2014, mainly because of, one, a decrease in wafer shipments, two, the absence of revenue from Bright Semiconductors, as we have deconsolidated Bright due to loss of control on December 30, 2013. Also, revenue from Wuhan Xinxin was zero in Q1 2014 compared to $8.2 million in Q4 2013. There will not be any wafer shipments from Wuhan Xinxin going forward. Cost of sales decreased to $355 million in Q1 2014, down 11% QOQ from $398.9 million in Q4 2013, mainly due to a decrease in wafer shipments and lower provision for customer claims.
As a result of these reasons, and also due to product change and improvement in the fab efficiency, gross margin increased to 21.3%, up from 18.9% in the previous quarter, despite a drop in the fab utilization. Operating expenses in Q1 2014 were $66.5 million, compared to $84.8 million in Q4 2013. R&D expenses decreased to $36.7 million in Q1 2014 from $46.3 million in Q4 2013, mainly due to an increase in funding of R&D contracts from the government, which was $11.7 million in Q1 2014 compared to $4.7 million in Q4 2013. General administrative expenses decreased to $23.2 million in Q1 2014, down 36.6% QOQ from $36.6 million in Q4 2013, mainly due to, one, a decrease in benefit expense, two, a decrease in accrued employee bonus, and three, a decrease of government charges.
Other operating income was $3 million in Q1 2014 compared to $6.4 million in Q4 2013. The change was mainly due to gain arising from the deconsolidation of Bright due to loss of control recorded in Q4 2013. If excluding funding of R&D contracts from the government, gain from the disposal of living quarters, and employee bonus accrual, the non-GAAP OpEx was $79.4 million in Q1 2014 compared to $86.5 million in Q4 2013. Profit from operations in Q1 2014 was $29.6 million compared to $8.1 million in Q4 2013. Other expenses was $9.2 million in Q1 2014 compared to an income of $7.8 million in Q4 2013. The change was mainly due to foreign exchange losses arising from the devaluation of CNY against U.S. dollars in Q1 2014. Moving to the balance sheet at the end of the first quarter 2014. Total current assets decreased 8%.
Meanwhile, total current liability decreased 9%, translating into a slight improvement in our current ratio. Other financial assets decreased to $178.4 million in Q1 2014 from $240.3 million in Q4 2013, mainly because some short-term investments matured. Our long-term borrowing decreased $89 million, and our short-term borrowing decreased $77.4 million compared to the previous quarter. At the end of Q1 2014, our total debt-to-equity ratios decreased to 28.5% compared to 45.2% in the previous quarter. In terms of cash flow, we generated $169.4 million cash from operations in the first quarter of 2014, compared to $205.4 million in the fourth quarter of 2013. Cash used in investment activities decreased to $24.9 million in Q1 2014 compared to $269.1 million in Q4 2013, mainly because of additional short-term investment made in the previous quarter.
Cash flow from financing activities changed from an inflow of $52.7 million in Q4 2013 to an outflow of $168.4 million in Q1 2014, mainly because we repaid some short-term borrowings. Cash and bank balances at the end of the first quarter of 2014 was $437.6 million, compared to $462.5 million in the previous quarters. To examine our revenue by application, the consumer segment was our biggest contributor to revenue this quarter. Revenue from this quarter contributed 48.8%. Revenue from communications contributed 39.1%. Geographically, revenue from North America contributed 46.6% of total revenue. Revenue from China contributed 40.6% of total revenue. Europe, Asia contributed 12.8%. In terms of technologies, revenue from 45/40 node contributed 9.8%. The drop in the revenue contribution from the 45/40 node was mainly due to inventory correction and seasonality. Revenue from 65/55 node and 90 nanometers decreased 4.6%.
Meanwhile, revenue from 120 micron and above was flat quarter-over-quarter. In terms of our overall capacity, total monthly capacity at the end of the first quarter was 243,500 wafers, compared to 234,000 wafers in the fourth quarter. The change was due to the expansion capacity in our Shanghai 12-in fab and our Shanghai Zhangjiang 8-in fab. The overall utilization was 84.2% in the first quarter of 2014, compared to 87.4% in the fourth quarter of 2013. The planned 2014 CapEx for our foundry operations are raised to approximately $1 billion from the previous $380 million. The increase in CapEx is for the purchase of used equipment for our Shenzhen 8-in fab. Of the total CapEx of approximately $1 billion, around $570 million is for our Beijing joint venture fab, which is 55% funded by SMIC and 45% funded by the other shareholders.
In addition, we have budgeted CapEx for non-foundry operation of approximately $110 million, mainly for the construction of the employee living quarters. I would now hand the call back to En-Ling Feng for the Q&A session.
Thank you, Gareth. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two questions per person. Thank you, and Operator, please assist.
Certainly. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Your first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Hey, thank you. The first question I wanted to ask on the 40 nanometer business, where you mentioned the decline was due to inventory and seasonality. I just want to see now looking forward, the view on, I think, snap back from there, from seasonality reversing and getting past inventory correction. If you could talk more about the design wins. I am not sure if I heard it correctly, is it one high-volume Wi-Fi win for multiple applications, or is this multiple design wins? If you could, I guess, give a look at how 40 will ramp and scope of design wins.
Okay. Hi, Randy. Thanks for the question. I think the 40 nanometer, we are seeing a robust recovery in the quarters to come. There are a number of design wins and new product going into production, which include a very high volume Wi-Fi as well as the coupled baseband products. We are also seeing a very strong NTO. Our new tape-outs for the first two quarters is almost equal to the whole last year's tape-out. We see this new tape-out trend continued throughout this year. It will give us a much wider product portfolio, and we will be having also a much wider customer base. This will definitely look to reduce the volatility due to a smaller number of customer base.
Just to add on what Tzu-Yin said, I think we are still targeting above mid-teens revenue from this node for the whole of 2014.
Okay, great. My second question, maybe moving on from that. I think when you look at 2015, I am curious when you look at a year, if you think 40 nanometer would continue to grow into next year as a percent of sales, where from next year, I think from customers, you are seeing a lot more shift to 28 nanometer. If you could talk within 28 nanometer, is it now moving more to high-k metal gate, or you see the equal strength or strength still for polysilicon as well for 28 nanometer, and how significant you think 28 nanometer versus 40 nanometer could be next year?
Okay. We see that there are still a lot of new tape-out in 40 nanometer. In that sense, we continue to think that the 40 nanometer amount will be a good streaming of new product and customers. As far as the 28 nanometer is concerned, I think roughly it is a 50/50 split. We have just as much customer interest in polysilicon as well as the high-k metal gate. That is why we were actually quite happy that we have both technology to offer to our customers.
If I could put a quick follow on. For the 28 nanometer, will high-k come after polysilicon or at this stage where you come in, would you be able to have product and revenue for both, or is there a delay for the high-k?
Our technology readiness is roughly the same. They are only months apart. However, the first product to ramp, indeed, is polysilicon.
Okay, great. Thank you.
The next question comes from the line of Steven Pelayo from HSBC. Please go ahead.
First, just to follow up. 40 nanometer was less than 10% of revenues in the first quarter, and you are talking about mid-teen, so I guess that would imply you are going to have a quarter above 20% if we are going to do that. So maybe your visibility is not into the second half of the year, but just looking into the second quarter, is 40 nanometer going to be able to snap back to a mid-teen run rate so we can get the full year guide on that trend, or what are we thinking about just for second quarter 40 nanometer contribution?
Yeah, I think for the same quarter, we think that there will be recovery in our 40 nanometer revenue to about mid-teens level.
Okay, so it is that sharp of a snap back. Okay, great. The gross margin upside in the March quarter, I think you guys had originally guided to 16%-19%, if I remember correctly. So there was a couple of hundred basis points. I understand you guys talked about a few different things here, but one would have expected, I think with the ForEx note falling off, that margins would have had much, much more pressure. So can you maybe help us quantify what really drove, how much came from lower provisions for customer claims, how much came from product mix? Some more details behind that, because I'm assuming your margins were quite good, and I just need a little bit more clarity on how we arrived at that.
Well, a number of things happened in the first quarter impacting our gross margin. I think, in terms of importance, the product mix change is one. The other one is the lower customer claim. Also, our fab was a lot more efficient in the first quarter. It bring down the cost. The negative impact from gross margin is on the, as I mentioned, the drop in the fab utilization. So altogether, it come out that actually, we are doing better on the gross margin than what we thought.
Okay. If I could just sneak in one more follow-up on the 40 nanometer. I did see that your Shanghai 300 millimeter fab capacity, I think, increased about 15% or so. So that must mean your utilizations were significantly lower. So I'm curious, where is that fab running, and where do you expect it to be in the second quarter if it's, I guess, mid-teens percentage of revenue?
Actually, we don't break down the utilization by fab or by node. But obviously, the utilization was lower in Q1. But as I mentioned, we do see a recovery in Q2.
Okay. I'll get back in the queue. Thank you.
Your next question comes from the line of Bill Lu from Morgan Stanley. Please go ahead.
Yeah. Hi, good morning. On the Shenzhen fab, you talked about the client used to put in that will ramp in 2015. Can you talk about, as that fab begins to ramp, is the gross margin going to be comparable to your other trailing edge fabs? And what kind of node is that equipment going to be good for?
Hi, Bill. Thanks for the question. As we ramp, we see that this particular fab will achieve the corporate margin quite soon after the ramp. This is an advantage of a used tool equipment. I think that's what technology that we are preparing to ramp. We have equipment that is fully capable for down to 0.13, 0.11. There are actually some fairly advanced equipment that can bring the lithography capability below 0.11. So we have, at this moment, quite a mix of products that will go into Shenzhen that probably requires 0.13 and above technology.
Great. Sorry, I should probably know this, but I don't. For used equipment, how many years do you depreciate?
We have the same policy as our existing 8-in fab, which is using six years.
Okay. My second question is, did you disclose China as a percentage of total revenues for 1Q? I'm curious if you can give us a hint for 2Q as well.
Yeah. The China revenue contributed about 40% in the first quarter. We do expect the contribution from China will remain around the same percentage in the second quarter.
Okay. China kind of growing in line with the non-China regions in 2Q.
That's correct.
If you look at the ramp at 40, is that really more China-driven or non-China-driven?
Actually, right now, we are seeing that in both our 40 nanometer as well as 28 nanometer, they are driven equally from our global customer as well as our domestic customers. We have a fairly wide spectrum of customers from both sectors.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Andrew Lu from Barclays. Please go ahead.
Thank you. Good morning. Two questions from me. Earlier, you guided the first quarter operating expenses, $88 million-$92 million, ended up with $70 million. What made a big gap from the guidance versus actual result?
Yeah. One thing is that we are being quite cost control in the first quarter. In fact, for both our R&D expenses and GA expenses all came down below our budget.
Isn't the cost control should be in the guidance already?
Well, yes. But I think we are more aggressive than what we planned for. Yeah.
Isn't the second quarter guidance again to be conservative? $89 million-$93 million operating expenses.
Yeah. One thing is that I think, if you look at our past record, I think we have been quite conservative in the way we guide.
Should we just take a more conservative number rather than $89 million- $93 million for modeling purpose?
I think you should stick to our guidance. We want to beat your guidance.
Okay.
Andrew, also in our guidance, it is specifically spelled out. It does not including the R&D funding, and does not including some.
Thank you.
Yes. Second question I have is the depreciation cost. Earlier you guide about $20 million at about 3.7% year-over-year increase. That is based on $880 million CapEx. Since the CapEx is being revised out, are we going to see the change on depreciation cost?
I think so, because actually, the increase in the CapEx, mainly for the purchase of the used equipment for the Shenzhen fab. For that portion of CapEx, because the production will start only in 2015, it would not impact the current year depreciation.
So we still use $20 million as compared to last year?
That's right. Yes.
Thank you.
Your next question comes from the line of Leping Huang from Nomura. Please go ahead.
Thank you for taking my question. Just one question. Can you comment on your customers' inventory correction situation? In Q2, has this already finished, or just your guide for the recovery of your 40 nanometer process? Have you seen basically your customer already finished all the inventory correction issue? Thank you.
Hi, Leping Huang. Thanks. Yes, indeed. We are seeing a fairly robust customers demand. In most of the part, we think that our customers have gone through and burned out their inventories. This is what we are seeing second quarter and the third quarter.
Okay. Thank you.
Your next question comes from the line of Suji DeSilva from Topeka Capital. Please go ahead.
Hi, good morning. Thanks for taking the question. A couple of maybe detailed questions on the 40 nanometer. Last quarter, you gave 10 tape-outs and four to five additional customers. Can you give those same metrics for the quarter you just reported?
I think it's also, let me see. Let me check the number exactly, okay? Yes, first quarter, we will have 10 tape-out as well.
About 4-5 additional customers as well?
Additional customers, let me see. I'm actually aware of at least two in my mind. There may be other smaller customers that I do not know myself.
Okay. I appreciate that detail. The second question is around the revenue per wafer. It's down sequentially and year-over-year. What are the puts and takes there for revenue per wafer as we progress through the rest of the year, given that you're ramping the high end and the trailing edge? Thanks.
Yeah, I think that the drop in the ASP per wafer in Q1 is because of the lower contribution from the 40, 45 nodes. As we mentioned, we're going to see some recovery in terms of the revenue contribution from that node from Q2 onwards. We do expect the ASP per wafer will increase in the second quarter and remain stable throughout this year.
Okay, thank you guys.
Your next question comes from the line of Sebastian Hou from CLSA. Please go ahead.
Oh, hi. Good morning, gentlemen. Can we see some update on the wafer bumping JV with JCET in terms of the amount to be spent, capacity scale, and also the timing of ramp-up?
Okay. I'll comment on the spending, and I'll ask Tzu-Yin to comment on the progress.
Yeah.
For JV, the total investment is $150 million, of which about $50 million will be from the capital contribution. We own 51% of the JV, so we'll contribute about $26 million to the capital of this JV.
Okay. Right now, this JV, the whole plan is going through the government approval process. We hope that everything is smooth, so we can start the installation by the end of the year. As in the government approval process, sometimes the whole timing is difficult to predict.
Okay. The installation would be in which location?
At this point of time, we are not ready to disclose until the government approval is fully granted.
Okay. All right. My next question on CapEx. Could you comment about the quarterly spending pattern for this year? Because Q1, their CapEx is definitely quite low. So more clarity from your annual view over here.
Yeah, I think the pattern probably would see more of the CapEx in the second half because a lot of this CapEx is for the phase II Beijing fab. So more will happen in the second half.
Okay. Any number, ballpark numbers in terms of the split between first half, second half?
I think probably you are talking about at least about 60% in second half.
Okay.
Okay. All right. Thank you very much, and nice quarter. Yeah.
Your next question comes from the line of Ken Hui from Jefferies. Please go ahead.
Thank you for taking my question. First of all, again, on 40 nanometer, as you ramp your production throughout the year, what is your expectation on the 40 nanometer gross margin as you exit this year compared to corporate average? This is my first question.
Yes. In terms of 40 nanometers, right now we're still in the course of ramping the production. The gross margin is a bit lower. We do expect the gross margin to improve as we bring up the fab and achieve a high utilization.
Would you expect the gross margin on 40 to be on par with corporate average or even better than corporate average by end of this year?
Likely.
Okay, thank you. Second question, as you have raised your CapEx budgeting for this year, do you see higher pressure for your cash position?
As mentioned in our management script, I think we are in a very strong position right now, both in terms of cash balances and also our debt-to-equity ratio. For the current year CapEx, I think we can fully fund it with our current financial resources.
Okay. Thank you much.
Your next question comes from the line of Gokul Hariharan from JP Morgan. Please go ahead.
Yeah. Hi, thanks for taking the question. My first question is on the 8-in capacity progress in Shenzhen. Now that you have 10,000 ready by end of this year, could you also outline how you plan to ramp it up further from 10,000, or is it around 10,000 that you will peak out? I have a follow-up question as well.
Okay. At the moment, we have sufficient used equipment to go up to 30,000, and with only a very small amount of shortage we still need to acquire. Some of the used equipment, we have sufficient capacity to go up to 50,000. Anyway, that is our longer-term target. In Shenzhen, we still target eventually to go up to 50,000.
Okay. Given that a lot of the spend is coming towards the end of this year, I think the CapEx this year seems to be above your EBITDA levels. Could you talk a little bit about how we should think about depreciation next year? Is that a big step-up from this year levels? Is it like a 10%-15% step-up from this year levels in terms of depreciation expense next year?
Obviously, if you look at our CapEx this year, we do think there's a slight increase in depreciation in 2015. Yeah.
Would that be a slight increase, or is it like a 10%-15% kind of increase, given that most of the capacity will come online next year and you probably start to depreciate them?
I don't have the exact number with me because the CapEx will correspond to the high depreciation. At the same time, it will be offset by some of this existing equipment that will go offline next year. But we can get back to you later on this point. Yeah.
Okay. Thank you.
Your next question comes from the line of Nelson Wang from Goldman Sachs. Please go ahead.
Hi, this is Nelson. My first question is about the Beijing new fab. I think you mentioned about 5,000- 6,000 by the end of this year. I am just wondering how about the capacity expansion for next year. I saw there was a news saying that the new fab will achieve 35,000. Do you think this is the goal for next year? Thank you.
Yes. Next year, we will have continued to ramp. This 35,000 wafer is a ramp over around three years timeframe. So it is a paced ramp, unless there is a significant increase in customer demand. In the short term, this year, we will ramp to 6,000 and we have a customer demand to ramp further 4,000 sometime next year. Overall, to achieve the 35,000, that is over about three years timeframe.
Okay. Sorry. You say additional 4,000 next year, right?
Yeah, we can already see additional 4,000. Yes.
Okay. My next question is about the gross margin. I saw that the utilization rate has been decreasing, but the gross margin has been increasing. You already mentioned this is due to the product mix change and some lower customer claims. Do you think this is an ongoing steady trend, or this is just a one-time event? Usually the utilization is really highly correlated with gross margin, but with such a low utilization, sorry, a relatively lower utilization, you achieved a relatively higher gross margin. Just wondering, is this a one-time event or an ongoing trend?
Yeah. Our outlook right now, we are quite hopeful about in terms of the business recovery from Q2 onwards. We are hopeful that our gross margin should continue to improve through this year.
Okay. Thank you.
Your next question comes from the line of Leping Huang from Nomura. Please go ahead.
Okay. Thank you. Thank you for taking my question. My question is, I see a big jump of your R&D government subsidy. Can you comment on what's your guidance for this year, for the full year, and do you see a continuous What's the trend of the R&D government grants looking forward for 2015, since in the financial statement, in the annual report, I see you have CNY 114 million unrecognized R&D subsidy. Also, can you comment on, can we in the future, 2-3 years, when you fully ramp up the 10 - 8 nanometers, can we assume that these will be fully recognized to your P&L? Thank you.
Okay. Let me get back to you on your question about the R&D funding that we recognize on the income statement. in 2013, we recognized about CNY 28 million R&D funding on our income statement. For 2014, we do see a slight increase this year. I think for modeling purpose, maybe you should model about CNY 30 million -CNY 35 million that will be recognized on the income statement. Okay. On the question of what you see on our annual report of CNY 114 million, this is the whole amount of the cash that we received from the government in terms of the funding. But because some of this is actually for the purchase of equipment, and in terms of recognition on the income statement, not the full amount will be recognized on the income statement. Okay. So there are some differences in accounting treatment, so we should pay attention to. Yeah.
Okay. Can you also, since there are lots of articles saying the government are increasing the government support on the IC industrials, have you seen the actual benefit to your P&L from this government policies? Also, another related thing is, I think you set up a venture capital to do the IC capitals. Can you comment on what the purpose or what the objective of this IC venture capital is? Thank you.
Okay. Let me answer on these questions. We also have been seeing a lot of press on this potential new government policy. We welcome any government policy that encourages R&D and encourages a robust semiconductor business in China. At this moment, this is a policy, and we have not seen the actual implementation of this policy as yet. Therefore, we have not actually received any direct benefit from this policy at this moment. As far as the venture is concerned, that we have set up this venture actually to encourage the completeness of the semiconductor ecosystem here in China. So we will be trying to do some small amount of investments in the companies that are on both upstream as well as downstream from the foundry, as well as potentially in some of the new enterprises that come up around semiconductors. So, this is actually to encourage a robust semiconductor ecosystem.
I do not know whether Yonggang has anything to add.
No.
Okay. Thanks.
Your next question comes from the line of Eric Chen from Daiwa. Please go ahead.
Good morning. Very quick two questions. The first, Dr. Chiu You are talking about ecosystem, and you talk about SMIC probably will do some investment from some semiconductor company. Could you give us an idea, in term of your fund pool, the investment size? How much money you plan to put in, and also the direction and what kind of companies are you looking to have a more cooperation, or say, the more investment and what kind of the product, the area? That is my first question.
I will come in on the funding side, and ask you to comment on the direction of investment. We have incorporated a new subsidiary called Capital Corporation, which is mainly for the venture investment. The initial capital we have set up is CNY 500 million .
Right now, potentially we can attract more capital from third parties in the future, but initial investment from us is CNY 500 million .
That is the total fund size, right? Fund is SMIC, right?
No. That is the amount that we have put into the fund as an anchor investor. We do expect we get more investment from the third parties.
What kind of third party are you talking about? Is it local venture capital or any government funds?
It could be from a number of sources. From government or from other interested parties.
I see. Thank you. Dr. Tzu-Yin, please.
Yes. I think that we are at an initial stage on investigating on what are our investment targets. Potentially, that includes various hardware parts, producers, and as well as the, for example, potentially design service area and also potentially new startup with new technologies. This is a fairly wide potential investment around semiconductor areas.
Dr. Tzu-Yin, when you talk about the startup, the new technology, can I assume that is the IC design house and the local IC design house, and many you talk about, right?
There are, I think IC design house is part of the potential portfolio. But there are many others such as I said, chemical suppliers, parts suppliers, that will help to complete the ecosystems in China.
Okay. What are interest, how you balance or say, how you handle the conflict of interest. For some new startup company, you do some investment, probably that is good for the both party. But for the other local semiconductor maker, they probably will have a cautious because of conflict of interest. So how you handle this kind of conflict of interest and from your SMIC investment? Thank you.
Okay. Yes. I think that we are keenly aware of this kind of issues, and SMIC will not take any controlling stake, and we will keep our investment small. This type of similar investment fund are fairly common in the foundry industry. So that all of us face the same thing, but all of us have the same intention to encourage the activity of various innovations in this industry.
Okay. I see. Thank you. My second question regarding to the CapEx. I probably missed. How much money for all the year 2014 CapEx? Is that $1.1 billion? I would like to get the idea for the CapEx number this year and also the depreciation expensive, how many percent year-on-year growth? Also about capacity-wise, how many percent year-on-year growth? Thank you.
Yes. In terms of the total CapEx for 2014, for the foundry operation, as I mentioned, it has been raised to $1 billion, and we have budgeted $110 million for the non-foundry operations. So all together is about $1.1 billion for the current year CapEx. In terms of the depreciation for this year compared to 2013, in 2013 is about $545 million in terms of depreciation. For this year, we are looking at about $560 million.
So more like 5% year-on-year growth, right?
Yeah.
Okay. How about the capacity? I mean, the capacity expansion, how many percent year-on-year growth? Thank you.
Yeah. Comparing 2014 against 2013, the growth is about 8.5%.
Okay. 8.5%.
For the annual capacity.
Okay. I remember you also mentioned the revenue per wafer will rebound from second quarter and will have the quarter-on-quarter growth sequentially until the year ends. So I assume the revenue per wafer this year will have a positive year-on-year growth. Based on your capacity, the 8.5% year-on-year growth, I pretty much can get a clear idea. One is that your gross margin will improve from a year-on-year point of view. The other one is your revenue growth is highly likely to reach over 10% year-on-year. Once your utilization rate now declines. Right? Does that make sense for you?
Yeah. Overall, I think you're right. I just want to correct one point, in terms of the ASP. What I mentioned is that because of the recovery of the 40, 45-nanometer node revenue in Q2, we should see a recovery in our ASP per wafer in Q2. Then for the rest of the year, we should maintain revenue stable.
Okay. How about year-on-year base? Can I assume that it will grow?
Eric, you have more than two, three questions now.
Okay. I am sorry.
You can go to the next one.
Okay. Thank you.
Your next question comes from the line of Chris Yim from Mizuho Securities. Please go ahead.
Hi. Thanks for taking my question. I only got one question on your China LTE ramp-up outlook. Can you give me more color as to what type of products, what type of semiconductor components, as well as what type of customers you see demand from? And just in general, just looking for more color on this new demand driver. Thanks.
Yes. We are actually looking forward to the LTE opportunities. There are a model of customers who are very strong in the baseband, in the power management, and as well as RF, as well as CIS. So, we see that the LTE ramp in China will benefit SMIC in the next few years.
Great. Thank you.
Your next question comes from the line of Bill Lu from Morgan Stanley. Please go ahead.
Yeah. Hi. Dr. Tzu-Yin Chiu, just one quick question. Can you talk about your outlook beyond 28 nanometers? I think some people in the industry are starting to talk about 20 as more of a transition node. Maybe 14/16 being more long lived. How do you think about that?
Okay. Right now, we are focusing very much on the 28 ramp up. Beyond 28, we already have effort in doing our 14/16 FinFET. This is our two major R&D effort, in terms of the advanced technology work.
Sorry, so you're doing 14 and 16?
No, just FinFET. So it's only one generation.
Okay. Are you doing 14 or 16? I am sorry.
14.
Okay. I guess related to that, how does the tie-up between GlobalFoundries and Samsung affect you at 14 nanometers?
Well, we do not try to comment on our competitor's activity. At this moment, we are still proceeding our direction fairly steadily.
Okay, great. Thank you.
Thank you.
I would now like to hand the call back to CEO, Dr. Tzu-Yin Chiu, for closing remarks.
In closing, I would like to thank everyone who participated in today's call, and again, thank all of our shareholders, customers, employees, and suppliers for their trust and support. Thank you. See you next time.
This is the end of SMIC's first quarter earnings conference call. We thank you for joining us today.