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Semiconductor Manufacturing International Corporation (SMI)

Q1 2009 Earnings Call Transcript

April 29, 2009 8:30 pm ET

Executives

En-Ling Feng – Director, IR

Morning Wu – Acting CFO and Chief Accounting Officer

Richard Chang – Executive Director, Founder, President & CEO

Garris [ph]

Analysts

Randy Abrams – Credit Suisse

Pranab Sharma – Daiwa Securities

Steven Pelayo – HSBC

Daniel Zu [ph] – Wuxi Research [ph]

Donald Lu – Goldman Sachs

Kichen [ph] – Thai Capital Market [ph]

Operator

Welcome to the Semiconductor Manufacturing International Corporation's first quarter 2009 webcast conference call. Today's conference call is chaired by Dr. Richard Chang, Chief Executive Officer and President; Ms. Morning Wu, Acting Chief Financial Officer; and Mr. En-Ling Feng, Director, Investor Relations.

Today's web cast conference call will be simultaneously streamed through the Internet at SMIC's website at www.smics.com. Please be advised that your dial-ins is in listen-only mode. However, at the conclusion of the management presentation, we will be having a question-and-answer session upon which you will receive further instructions as to how to participate. The earnings press release is available for download at www.smics.com.

Without further ado, I would like to introduce you to Mr. En-Ling Feng, Director, Investor Relations for the cautionary statements.

En-Ling Feng

Good morning everyone. Welcome to the SMIC first quarter 2009 earnings conference call.

Joining me on the call today are Dr. Richard Chang, Chief Executive Officer and President; and Ms. Morning Wu, Acting Chief Financial Officer. Our call will be approximately 60 minutes in length. The earnings press release and presentation are available for download at www.smics.com.

Please note the following Safe Harbor statement. SMIC 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 the 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 United States Securities and Exchange Commission on November 28, 2008.

For today's agenda, Morning will highlight our first quarter 2009 financial results and the second quarter 2009 guidance with a summary of cash flow statements and balance sheet in the appendix for your ease of reference. Following that, Richard will provide an update on our business.

I will now turn the call over to Morning.

Morning Wu

Thank you, En-Ling. I would like to highlight the following items, which are all stated in U.S dollars. Overall revenue in the first quarter of 2009 is 37.5% better than our previous guidance, equates to $146.5 million, down by 46.2% quarter-over-quarter from the fourth quarter of 2008 due to a 47.8% decrease in wafer shipments.

Gross margin was a negative 88.3% in first quarter of 2009 compared to negative 27.4% in fourth quarter 2008 due to a significant decline in wafer shipments and fab utilization. The company recorded a net loss of $178.4 million in first quarter 2009 compared to a net loss of $139.5 million in fourth quarter 2008 due to declines in overall industry demand.

Despite a soft reduction in fab utilization, the company generated $78 million of net cash flow from operating activities in the first quarter of 2009. The company has lined up new credit facilities totaling approximately $240 million. Simplified ASP increased to $869 million in the first quarter 2009, up 3.5% quarter-over-quarter from $843 million in the first quarter of 2008 and up 8.9% year-over-year from $798 million in the first quarter 2008.

Summary of our income statement, balance sheet and cash flow statements are available in the appendix. Our guidance for the second quarter of 2009 is as follows. Revenue is expected to increase 58% to 62%. Operating expenses excluding foreign exchange difference will range from $79 million to $83 million. Capital expenditures will range from $38 million to $43 million. Depreciation and amortization will be around $203 million to $206 million. Total capital expenditures for 2009 are still expected to be around $190 million, and will be adjusted based on market conditions.

I will now turn the call over to Richard for the business update and review.

Richard Chang

Good morning and thank you all for joining us today. In the first quarter, our revenue exceeded our previous guidance by 7.5% and our quarterly ASP increased 8.9% year-over-year. Among the total wafer revenue, logic products contributed 96.9%. We also witnessed significant month over month increase on wafer orders and fab movement since Chinese New Year.

The stronger order recovery was driven in part by the replenishment of depleted inventory, and also from increased demand in Chinese domestic consumption on wireless LAN, mobile phones, digital displays, and other consumer electronics.

Global customers continued to utilize SMIC’s strategic position to capture the China market, which has experienced faster recovery since the beginning of this year due to various domestic stimulus programs sponsored by the Chinese government.

We expect our second quarter 2009 utilization rate to double compared to the first quarter. From the advanced technology front, our 45nm low-power technology qualification progress is on-track and has shown qualification chip yield improvement. We completed licensed technology transfer from IBM on high-performance bulk-CMOS technology last quarter, and process qualification is in progress in our Shanghai 300mm facility.

Numerous customers are engaged in our lead-customer partnership and design-in activities, in parallel with SMIC's silicon verification with IBM's proven 45nm technologies. Furthermore, 65nm customer low-power product qualification is in its final stage. We are positioned to move into volume production in the third quarter of 2009.

In the first quarter, we have received strong orders reflecting recovering demand from 90nm and 130nm technology nodes. Furthermore, we see promising new tape-out activities in the first quarter, averaging more than one tape-out per day. We continue to forge more strategic alliances to better serve our customers; such as with Dolphin Integration for its ultra-low power digital-to-analog audio converters for the Portable Media Player market, and with FlipChip International for next-generation 300mm flip chip bumping and wafer level packaging. We remain committed to collaborating with global partners to enhance our product portfolio and service scope.

In the first quarter 2009, we generated $78 million next cash from operating activities despite the challenging market conditions. In March 2009, we signed a memorandum on strategic cooperation with China Export-Import Bank, China EXIM Bank, under which China EXIM Bank intends to provide total credit facilities up to RMB 3 billion, which is equivalent to US $438 million, to SMIC.

As Phase I of this cooperation, China EXIM Bank has already approved a $140 million 2-year credit facility to us. During the first quarter of 2009, the company has lined up new credit facilities totaling approximately $240 million. This has significantly strengthened our financial position.

Into the second quarter of 2009, we are encouraged by the increasing orders received. We anticipate approximately 60% quarter-over-quarter increase in revenue in the second quarter of 2009. We are hopeful that the worst is behind us, and we are working hard on all fronts to strengthen our operational and financial performance as the overall market continues to recover.

I will now and the call back over to En-Ling, who will moderate the Q&A section of this call. En-Ling Feng.

En-Ling Feng

Thank you Richard. Before we go into Q&A, I like to announce our upcoming analyst date schedule for beginning of September this year. We will be sending you more information for this event in the coming weeks. I would like to open up the called for Q&A now. Please limit your questions to one or two per person. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Randy Abrams with Credit Suisse. Please proceed.

Randy Abrams – Credit Suisse

Yes, thank you. If you could talk about based on your guidance, where you think 12 inch and 8 inch utilization will be by June, and based on that, I am curious where you are in terms of the $190 million CapEx, how close you are to triggering you have to raise CapEx, at what utilization on 12 inch, do you think you need to add capacity?

Richard Chang

Okay, thank you. By the end of June, our 300mm fab utilization rate will be very high, and our estimate is maybe above 80%. For 200mm fab, we will have quite a few of them, and each fab has different position. Our overall utilization rate will be more than 60%. This is our comment – estimate. And for the $190 million CapEx, we basically plan to use majority of the CapEx to extend our 300mm capacity and capability, and for the 200mm facility, we plan to do a few of (inaudible) management. To answer your question, most of the CapEx will be used for 300 mm capacity and capability expansion.

Randy Abrams – Credit Suisse

Okay, thank you, and for the follow-up, if I could ask on the OpEx is going up from $47 million to $79 million to $83 million, if I have that right, could you talk about what is driving the increase, and is that a new base for OpEx, or is it the one quarter event, or it goes up to the new level?

Richard Chang

Yes, Randy, I think, actually the CapEx moved up in Q2 mainly because, we are going to put less R&D (inaudible) in Q2. Reason because R&D is all project based, and it will happen in Q2, right now we don’t anticipate we are going to book any. So which is why the CapEx has gone up. And then, R&D we're going to spend a little more money, because we're going to accelerate the R&D on the 45nm, the rest is all coming down actually.

Randy Abrams – Credit Suisse

Okay, and if I could ask for that $190 million CapEx, how much capacity are you going to add at your 300mm fab?

Richard Chang

We expect – the range will be $140 million, around maybe $149 million to $150 million.

Randy Abrams – Credit Suisse

How much wafer capacity?

Richard Chang

(inaudible) capacity because we're doing most of those on the (inaudible). So wafer, we can increase maybe 3000 to 5000 wafers per month.

Randy Abrams – Credit Suisse

Okay, thank you.

Richard Chang

Minimum 3000, could be as high as 5000.

Operator

And the next question comes from the line of Pranab Sharma from Daiwa Securities. Please proceed.

Pranab Sharma – Daiwa Securities

Hi, yes, thank you for taking my question. Good morning Richard, this is, my first question is on breakeven utilization rate, could you give us some color on what will be your break even utilization rate at current product mix, and how you think that you'll be able to exit the breakeven, whether you'll be able to do it sometime this year. What is your opinion on that?

Richard Chang

Yes, Sharma. We studied this and we have very good information. I will ask Garris [ph] to reply you please.

Garris

On the breakeven utilization, let me just highlight two things. Actually, in terms of one of the – as I understand, looking at our cost structure, one of the key issues that we have in terms of the high depreciation, and what we forecast is that absolute depreciation is going to decrease about 15% in 2010, and continue to decrease another 11% in 2011. And the other thing, yes, expecting a break even utilization in terms of product mix, and we expect – we're going to ramp up 65nm this year, and for the 45nm, the ramp up will be next year. So on these two conditions, we believe that we can break even between 80% to 85% utilizations.

Pranab Sharma – Daiwa Securities

Okay, 80 to 85. Then second one is – could you give some color on second-quarter ‘09, which product segment you are looking at stronger growth, and what percent of your first quarter revenue was from the China customer, and how they are planning out on the second quarter?

Richard Chang

Okay, I will answer the first question, Q1 about 32% of our revenues come from the Greater China customers, and Q2, local China customers continue to grow, but somehow customers outside of China grew even faster. With Q2 respect, about 27% of our revenue will come from Greater China customers. And in Q3, Q4 we expect maybe anywhere between 28% to about 29%, the revenue will come from the Greater China customers. The reason is that outside China demand is very strong. But this is the direct orders, so this is so special. To answer the other question, Garris will give you the answer.

Pranab Sharma – Daiwa Securities

Which segment is going to grow faster in the second quarter?

Garris

We are going to see enough growth in the advanced technology, mainly the 90nm and 0.13 micron, and in the second half, we're going to run on 65nm.

Pranab Sharma – Daiwa Securities

Does the technology – application wide, in the communications you are seeing more growth or –

Garris

The communications sector will be the strongest and followed by the consumer.

Richard Chang

We also see PC-related product also start to show a recovery. We see communication recover the earliest and the fastest. And especially in China, the consumer product also recovered very nicely. Then the third is the PC.

Pranab Sharma – Daiwa Securities

Thank you.

Richard Chang

Thank you.

Operator

And the next question comes from the line of Steven Pelayo with HSBC. Please proceed.

Steven Pelayo – HSBC

Hi, can we focus on gross margins here. In the past, we didn't like to guide gross margins given the volatility of DRAM ASP, but with memory less than 5% of the mix, maybe you could provide us a little bit more guidance and where gross margins are going, and maybe also talk about if you get to an 80%, 85% breakeven utilization rate, what kind of gross margin assumption you are assuming in that math?

Richard Chang

Okay, Garris will give you the answer.

Garris

Obviously in Q1, our gross margin performance is still not good because the fixed costs are high, and we have very low utilization. But we are seeing the trend is going up, and with extra market support, I think we can see potentially see a big improvement in Q2, and maybe in terms of the break even utilization, for us actually, we would say our gross margin would be about 20%.

Steven Pelayo – HSBC

I am sorry. I missed that last one. Can you say that again Garris?

Garris

Yes, the break even – in terms of the break even scenario, we are talking about 20% gross margins.

Steven Pelayo – HSBC

About 20% gross margin, and do you think into 2Q, you can actually get to breakeven on the gross margin line or is gross margin still likely negative?

Richard Chang

It will be slightly negative still.

Steven Pelayo – HSBC

Okay, thank you.

Operator

(Operator instructions) And the next question comes from the line of Daniel Zu [ph], Wuxi Research [ph]. Please proceed.

Daniel Zu – Wuxi Research

Hi, first my last name is pronounced Zu. I know it is very hard to pronounce, but pronounced Zu. My first question is regarding your depreciation expense with the cost of goods sold, it looks like the total depreciation must be relatively stable, but your COGS depreciation dropped so much, is there any reclassification, and what is your expected depreciation within cost of goods sold for Q2 in 2009?

Richard Chang

Okay this – let me do accounting. Actually, for – as you rightly pointed out, the D&A expenses quarter-to-quarter is relatively stable. But because in Q1, our shipment is slow, but our fab is very busy. That means we had a lot of inventory in the fab. As a result, a critical portion of this is actually allocated to the inventory. And what you see in the cost of goods sold, which is linked to the fab shipments, the proportion of depreciation has come back. I think that is the main reason.

Daniel Zu – Wuxi Research

Okay, thank you. My second question is what is the best way to forecast the capacity? I understand, earlier you said like, for the CapEx $40 million to $50 million would add 3000 to 5000 wafers amount for the troubled fab. But if I look at this quarter and last quarter, you know the capacity dropped like 3000 wafers from just because of the different product mix. So going forward, what is the best way to forecast the capacity?

Richard Chang

You asked a very good question, because capacity is related to product mixture. You can see some in 0.35 micron they use only 3 to 4 metal layers, but for the 65nm use 9 to 10 metal layers. So it affects – many, many of the capacity related. So maybe Garris would you please or Morning you can forecast.

Morning Wu

I think if you top out by end of this year, I think the excess capacity should be more or less stable compared to what we discussed in Q1. We potentially can see a higher-capacity for our Beijing fab. And I think the number is driven further.

Daniel Zu – Wuxi Research

Okay, thank you very much. If I may, a housekeeping question, for operating expense like in Q2, you expect almost double that in Q1, but the increase is mainly R&D or spread evenly within SG&A?

Morning Wu

Yes, actually, the G&A expenses and some expenses we are seeing the trend come back. R&D expenses will go up for two reasons. One is because we are going to receive less R&D facilities in Q2. As I mentioned, this is project based, and it happens that if we are not going to book any in Q2, and the other is that, actually our view is that it could go up slightly, because we are doing more R&D on the 45nm.

Daniel Zu – Wuxi Research

Okay, thank you.

Richard Chang

Thank you Daniel.

Operator

And the next question comes from the line of Donald Lu with Goldman Sachs. Please proceed.

Donald Lu – Goldman Sachs

Hi, Richard good morning. First is do you have a estimate on how much of your revenues are consumed by China market versus like shipments into Chinese customers?

Richard Chang

We – actually the revenue and our capacity in proportion, when we serve the greater China customers. Greater China customers previously, most of them use 0.18 micron or larger (inaudible) technologies. But about a year ago we see a lot more of the Greater China customers shift to 0.13 micron and 0.11 micron. Now, we see quite a few entering the 90nm technology node, and the reason we are engaged – just last quarter we engaged 4 new China-based customers. They started to work on the 65nm, and we are going to start to work on the 45nm technology node with us. It is difficult for us to answer your what product revenue is consumed by – or the revenue consumed by Greater China customers. But we –

Donald Lu – Goldman Sachs

I mean, let us say, how much of your customers’ revenues are consumed by Chinese people in the China market? Let us say, are all your Chinese customers’ products are serving China and the markets. Let us say, for example, it is spread from (inaudible) is probably 100% in the China market.

Richard Chang

Yes, we estimate that for the China customers, we estimate that may be 80% to 90% of their products consumed in the China market.

Donald Lu – Goldman Sachs

Okay, and how about the other customers’ revenues?

Richard Chang

Other customers, some U.S.-based customers. Our previous estimate is about half-half. When they place a order, half (inaudible) – and then over 50% is for China customers, the other 50% is the total worldwide outside China.

Donald Lu – Goldman Sachs

I see. Okay, thanks. And may just – can you just repeat how much of your revenue is from China customer in Q1 and Q2?

Richard Chang

Garris has the number. Garris please read it for us.

Garris

For greater China, Q1 is 32% and for Q2 it is going to be in the 25% to 30% range.

Donald Lu – Goldman Sachs

Okay, great. Thank you. Yes. Hi, just ask again. We didn't hear clearly, what's the reason why there have been more allocations of depreciation in cost of goods sold this quarter.

Garris

Hi, Donald, this is really accounting issue, because our quarter-on-quarter depreciation actually is relatively stable, but because of depreciation for every quarter you will allocate in 2 major proportions. One is in the cost of goods sold, one is in the inventory, and quite often includes, our shipment is quite low. Apparently, it is very busy. So we are creating a log in the fab. So a greater proportion of the depreciation goes to the goods as a result.

Richard Chang

Donald, for example, after Chinese new year in the middle of February, we start to see a lot of order coming, but the delivery they want to do in April or in March, but most of those in April, May and June. So, in March we receive a lot of more orders. We really appreciate that. But the fab is very busy, so placing – making wafers to be delivered to the customer in the second quarter. That is why Garris said allocate a certain portion of the depreciation to the inventor.

Donald Lu – Goldman Sachs

Okay, great. And in terms of profitability, I know your goal is to breakeven potentially by Q4 this year, is that still the case and if that is, what kind of SG&A expense levels should be factored?

Richard Chang

Donald, I will answer the first question, we are very actively going to quantify more customers in the 65nm technology node, and we try to quantify at least one customer, try to quantify one customer, at least in the 45nm technology node. So if these are all successful, in Q4 and also if the market has no drastic change in the downturn or something, then we expect in Q4, we may be able to be profitable, but to be conservative, I like to really to keep our new guidance at a – most likely in 2010, we should be able to be profitable, 2010. For 2009 gross profit, we are still working on it based on the condition I just mentioned, and with the – if we try to do that, then the financial information you asked, I have asked Garris to provide.

Garris

Hi, Donald, I think based on our model, we should be able to break even at about 20% gross margins.

Donald Lu – Goldman Sachs

20% gross margin.

Richard Chang

Yes.

Donald Lu – Goldman Sachs

So (inaudible) also that means the SG&A would be about 20% of sales. You are talking about break even on the operating line or fab line?

Richard Chang

Break even at a net income level.

Donald Lu – Goldman Sachs

The net income level?

Richard Chang

Yes.

Donald Lu – Goldman Sachs

Okay, and your other interest expense et cetera, would remain pretty flat?

Richard Chang

Yes. It is pretty stable. You know, I think sort of we see in the next 12 to 24 months, I think the interest expense will be quite stable.

Donald Lu – Goldman Sachs

Okay, great. Thanks.

Richard Chang

Thank you Donald.

Operator

And the next question comes from the line of Kichen [ph] with Thai Capital Market [ph]. Please proceed.

Kichen – Thai Capital Market

Oh, yes. Could you talk more about the R&D subsidy? I guess, you mentioned you won't have any in second quarter. How about the second half of 2009 and also 2010?

Richard Chang

Okay, good question. We expect, again based on our application and also the information we received from the government that in 2009 the total R&D subsidy should be close to – the cash portion will be close to $100 million US dollars and Q2 we did not book it, because we don't know when we are going to – we know people in R&D Institute already approved our application, but the extent on how soon they can grant the funds to us. So Q2 to be conservative within our focus, but somehow we may still be able to receive them. But as you can see in Q1, we received about $22 million R&D. So the rest of the close to $80 million will be given to us for the rest of the year. At this moment, we will book most in the third quarter and the fourth quarter. Somehow, some of the R&D funding may come in as early as in Q2.

Kichen – Thai Capital Market

Okay. One more question. What the price situation in second quarter and in the second half of 2009. What do you see?

Richard Chang

We see that due to the industries slowing down in industry, we see some softening trend in this industry, as we may become softening, especially – some of our competitors they are doing it. So we face a lot of pricing pressure as well. Somehow, we understand that some of the foundries are offering incentive, special incentives for Q1 and Q2. This part we heard from our customers. They also give us pressure to match, but this is very, very difficult for us to comply with that kind of situation. However, we also heard that for the second half of this year, many of the foundries, other foundries incentive program. So the ASP situation may return to normal, may actually recover some profit in the second half of this year. This is our information for you. When SMIC competes with the other foundries, we have some disadvantages because so far none of our fabs has been fully depreciated at all. So as Garris mentioned to you at the starting next year some of our fab will be – the depreciation will be completed. So next year our total depreciation will drop almost 13%. So they are going to help our gross profit margin a lot, and the following next year, our depreciation will further climb by another 11% or so. So, it will help us – our profit margin a lot.

Operator

(Operator instructions) And the next question comes from the line of Pranab Sharma with Daiwa Securities. Please proceed.

Pranab Sharma – Daiwa Securities

Yes. Thank you for taking my questions again. Richard, do you think that you will need to go for any more fund raising activities from equity market going forward to strengthen your balance sheet.

Richard Chang

Sharma, good question. We do not plan to raise any funds, because we don't need it, and as earlier today we recalled to you that we were able to receive quite a few credit lines from different banks in China. We look forward to one but actually more. We will recall to you later when everything is materialized, and so we do not expect. We have plenty of credit lines. As a matter of fact, Q2 our total cash on hand, but by the end of Q1 would actually increase. So another suggestion is that we are very thankful; however, if there is some strategic partner, they are interested to become our partner, and they really want to invest in us, bring a lot of added value, additional added value to the company, which is good for the investors then we will consider. If for any of the – we don't need the funding at the end of Q1, I think so, but we will not close the door for strategic partners to invest in us. Our size is really good for the investors.

Pranab Sharma – Daiwa Securities

And second one, you also – given your depreciation expenses for 2011 that is 11% year-on-year decline. That is based on what type of CapEx in 2010 if that is also a function of the CapEx?

Richard Chang

(inaudible). Okay.

Garris

Yes, our plan is that we are going with pretty tight CapEx control this year and next year. So again, we don’t think we are going to spend any CapEx next year. It will be mainly for the leading edge capacity.

Pranab Sharma – Daiwa Securities

But even if you put a couple of 1000 leading edge, your CapEx might go up quite significantly compared to this year.

Richard Chang

Yes, definitely this year, but I would say there will still be more to come out.

Pranab Sharma – Daiwa Securities

Got it. And what will be your depreciation for –what is the depreciation for this year, total expenses for depreciation for 2009?

Richard Chang

It isn’t too high.

Garris

Quarterly run rate right now is above $200 million.

Pranab Sharma – Daiwa Securities

Yes, so it will be $800 million roughly or it might come down a bit on second-half?

Richard Chang

It will be about $800 million, yes.

Pranab Sharma – Daiwa Securities

Okay, thank you.

Operator

And the final question comes from the line of Steven Pelayo with HSBC. Please proceed.

Steven Pelayo – HSBC

Sorry, this has been asked. I had to jump off for a moment. I’m curious about 65nm. What’s your capacity in terms of, you know, wafers per month. Let’s say in the second quarter, and what do you think the mix of 65nm will be of revenue in 2Q?

Richard Chang

Okay, second quarter our 65nm still in final stage of the classification. We have a quite a few products undergoing final stage of qualification now. We expect by the end of this quarter, second quarter, the revenue will be still a very small amount. The reason is that maybe the product classification will be completed in June, mid of June, and then stop production. So, delivery very little in June. So we will start on risk ramp up in May. So the number is still small. Second quarter we expect, first quarter we expect 65nm will be anywhere – to be 6%, maybe 6% to 8% (inaudible).

Steven Pelayo – HSBC

Okay, and then I'm curious with the lines of credit here. How do you think your total debt will track this year at the – may be at the end of June. What do you think your debt balances will be in – is there a level that you are kind of targeting.

Richard Chang

Yes. Garris please.

Garris

We think that our total debt will probably be around the same level for this year. It is clearly about break even in the sense that we are going to pay down some loans, and draw down some of them.

Richard Chang

So the debt is still the same, will remain flat this year.

Steven Pelayo – HSBC

Okay, then my last questions are, I know there is a lot of excitement, just talking a few months ago when we were talking about some of the initial pilot production during 2Q for TD. Can we get an update on your thoughts on TD and have you been able to kind of quantify the opportunity a little bit better now that you have some time to think it over?

Richard Chang

Yes, Steven TD, yes they are actually – with 4 different companies, designing TD-SCDMA capability chips, and about having one of them. We cannot give you the detail about each company’s decision, but overall TD will enter mass production second-half this year, if it is still correct, most of the companies using 65nm technology.

Operator

And we have a follow-up question from the line of Kichen with Thai Capital Market. Please proceed.

Kichen – Thai Capital Market

Yes, could you update us about Chengdu and Wuhan fabs, and what is the status for those fabs?

Richard Chang

Okay, Chengdu fab. We have actually two operations there. One is assembly testing. The second one is a front-end, and Chengdu fab started earlier, assembly testing is getting better and better, and the revenue is not too big because the size is still limited in mass production, and can be cash flow positive already achieved. And our goal is for assembly testing to reach balance sheet net profit positive by the end of this year, maybe – we want to attain it as early as possible.

So assembly testing is in much better shape, and in Chengdu, another 8 inch fab. We focus on making (inaudible) and some high-voltage project devices. So far, we have a lot of products, maybe more than 70 different kinds of products kind of being allowed in Chengdu fab. Maybe about 20 of them are already qualified; the others 50 of them are still in the process of qualification.

So we expect – again expect second half of this year to move 8-inch fab, the product is going to do better. However those are – we manage those fabs for Chengdu. So our strong – we do have very, very strong sense of responsibility to make that fab profitable as soon as possible for the government. Wuhan, it is because it just started, and now still in the process of being qualified. So, (inaudible) start to make some flash product, and mass production again we expect, maybe fourth quarter this year, where we may have some good products to start mass production in Wuhan. Again, we also have very strong sense of responsibility to help Wuhan Government manage its fab successfully and efficiently. Kichen, did I answer your question.

Kichen – Thai Capital Market

Yes, thank you so much.

Richard Chang

Thank you.

Operator

Ladies and gentlemen, this concludes the question and answer session for today's call. I would now like to turn the call over to Dr. Richard Chang for closing remarks.

Richard Chang

Thank you. Ladies and gentlemen, we are grateful for your continued support, and look forward to growing stronger under the current market situation. While we still have minimum visibility for the second half of the year, we believe the worst is behind us. We see China’s stimulus plan as facilitated opportunities for companies worldwide to penetrate the China domestic market.

Advanced technology development will further strengthen our market position with 65nm volume production and 45nm readiness this year. We have kept our operating cash flow positive, and remain disciplined with controlling our cost to ensure and improve financial position. We welcome you to visit us and keep in touch as the market undergoes transformation. Together, we can empower a brighter future. Thank you and God bless you. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Semiconductor Manufacturing International Corporation Q1 2009 Earnings Call Transcript
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