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Semiconductor Manufacturing International Corporation (SMI)

Q4 2009 Earnings Call Transcript

February 9, 2010 7:30 pm ET

Executives

Enling Feng – Director, IR

David Wang – Executive Director, President and CEO

Gary Tseng – CFO

Chris Chi – Chief Business Officer

Analysts

Randy Abrams – Credit Suisse

Bill Lu – Morgan Stanley

Dan Heyler – Banc of America/Merrill Lynch

Michael Chou – Deutsche Bank

Steven Pelayo – HSBC

Eric Chen – BNP

Rick Hsu – Nomura Securities

Pranab Sarmah – Daiwa

Operator

Welcome to the Semiconductor Manufacturing International Corporation fourth quarter 2009 webcast conference call. Today's conference call is chaired by Dr. David Wang, Chief Executive Officer and President; Mr. Gary Tseng, Chief Financial Officer; Mr. Chris Chi, Chief Business Officer; and Mr. Enling Feng, Director, Investor Relations.

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

Without further ado, I would like to introduce to you Mr. Enling Feng. Please proceed.

Enling Feng

Hello, everyone. This is Enling. And good morning and good evening and welcome to the SMIC’s fourth quarter 2009 earnings conference call. Joining me on the call today are Dr. David Wang, our new Chief Executive Officer and President; Mr. Gary Tseng, just on board Chief Financial Officer; and Mr. Chris Chi, Chief Business Officer.

As usual, our call will be approximately 60 minutes in length. The earnings press release and the presentation are available for you to download at www.smics.com. Please also be reminded of the Safe Harbor statement stated as follows. SMIC's statements of its current expectations are forward-looking statements subject to significant risks and uncertainties. The actual results may differ materially from those contained in 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 the United States Securities and Exchange Commission on June 22, 2009.

For today's agenda, CEO Dr. David Wang will speak on SMIC’s key initiatives and comment on our business. Following that, our CFO, Mr. Gary Tseng will highlight our fourth quarter 2009 financial results and first quarter 2010 guidance. Then we will open up the call for Q&A. I will now turn the call over to David.

David Wang

Good morning and good evening. Thank you for joining us for our earnings webcast. I’m very pleased and honored to be here with you today for my first earnings webcast as SMIC’s CEO. As you may know, I have worked in the semiconductor industry for many years, from semiconductor equipment industry to foundry service. And now as the leader of the new management team at SMIC, I intend to use the knowledge that I have acquired over these considerable years for one specific goal, sustained profitability.

To achieve this goal, we need to make the company more solid in all aspects of operations. Therefore in the last three months, much of my effort has been dedicated to recruiting a tough management team. Today I’m very proud to announce that we already have Chief Operating Officer, Dr. Simon Yang; Chief Business Officer, Chris Chi; and Chief Financial Officer, Gary Tseng on board. The last chief, the Administrative Officer and the Chief Legal Counsel will be on board after Chinese New Year.

Collectively, we, executive team, will have more than 100 years experience in semiconductor industry and more than 50 years experience in foundry industry. So therefore with these top world-class executives, SMIC is beginning a new era. We are determined to improve competencies across all areas thereby increasing the bench strength of the company.

Our new management team, those already here and the others soon to join us, will meet this objective head on. SMIC will become more competitive to face the challenges of the foundry market. To be sustainably profitable is SMIC’s number one priority. It will be evident through our planning, execution and the focus on core business that this is our main target.

SMIC is moving towards a customer-centric business model. We will introduce a centralized matrix organization, which will enable more effective synergies and communication across the company in all locations. This will certainly reduce costs of redundancy and overhead, increase efficiency and improve communication towards the goal of profitability. We also set up a new market-oriented business team to strengthen strategic alliances with our global key customers, selectively pursue new customers to maximize profitability and enhance our already strong market position in Mainland China. And this will be carried by our CBO, Mr. Chris Chi.

On the technology front, we continue to forecast and partner with our customers on advanced logic development and value-added legacy derivatives. We will continue to strengthen our product offerings through internal development, joint development and technology transfer. This will be carried by Dr. Simon Yang as our Chief Technology Officer and also our Chief Operating Officer.

Operationally, since I joined the company, we have made this a priority to improve our cycle time in coordination our supply chains, for better customer service and cost efficiency. Additionally, fab capacity will be aligned for higher margin products, and future investments will be made cautiously to support our core business. In short, turnaround is our top priority.

2010 looks to be a good year for the semiconductor industry. We believe it will also be an important step on our journey towards sustained profitability. As a management team, we are well focused on increasing revenue from advanced technology nodes, improving our legacy product offerings, enhancing customer satisfaction, controlling our costs, and leveraging our solid presence in the China market. I look forward to providing more in-depth information about SMIC’s strategies moving forward.

Now I’m pleased to turn to SMIC’s Q4 2009 earnings results. Overall, revenue growth was in line with expectations for fourth quarter of 2009, and the percentage of gross margin increased ten-fold over the previous quarter. This was due to an increase in our average selling price per wafer, total wafer shipments, and factory utilization.

I am also pleased to announce that our Greater China sales, as a percentage of total revenue, continued to grow and reached 38% of total revenue for the quarter. Of that, Mainland China sales reached 21% of total revenue, growing 7% quarter-over-quarter and 23.6% year-over-year. Finally, I was glad to see that in Q4 2009, revenue from advanced technology nodes of 0.13 micron and below grew by 12.9% quarter-over-quarter.

Now I would like to turn to our CFO, Gary, to provide you with more Q4 2009 financial highlights and 2010 Q1 guidance. Gary?

Gary Tseng

Thanks, David. Well, thanks again for you to join us and I would expect to meet you in (inaudible) somewhere in the future. And as you just heard David’s assignments all of us, it seems a lot of work we have to do. So we’d better go back to work now. Well, now let me spend a few moments to highlight our fourth quarter financial results and give our first quarter 2010 guidance.

The total revenue increased by 3% to $333 million in the fourth quarter of 2009 from $323 million in the third quarter. This is an increase of 22.2% compared to the fourth quarter of 2008. Total year revenue for 2009 was $1.07 billion, which was down 20.9% from 2008 total revenue of $1.35 billion.

Turning to gross margin, we improved to 10.6% in the fourth quarter of 2009 compared to 0.8% in the third quarter of 2009 and minus 27% in the fourth quarter of 2008. The increase was primarily due to an increase in the fab utilization and also wafer shipments and ASP. Gross margin in 2009 was minus 9.7% compared to a gross margin of minus 4.4% in 2008.

Total operating expenses increased $496 million in fourth quarter ’09 from $99.2 million in third quarter ’09 and from $46 million in the fourth quarter ’08. And of course, this increase includes the charge of $269 million relating to the settlement of litigation and $139 million related to long-lived asset impairment. The total operating expenses in 2009 was $719.8 million compared to $317 million in 2008.

The net loss grew to $482 million in the fourth quarter of 2009 compared to the loss of $69 million in the third quarter of 2008 and the loss of $126 million in the fourth quarter of 2008. Total net loss in 2008 was at $122 million compared to the total net loss of $440 million. And of course, if you deduct the $400 million one-time charge I just mentioned earlier, this year’s net new loss is a little bit improvement from last -- in 2008.

The fully diluted EPS was negative $1.08 per ADS in the fourth quarter 2009 compared to negative $0.60 per ADS in previous quarter. Net cash flow from operations has increased substantially to $89.8 million in the fourth quarter of 2009 from $73 million in the third quarter of 2009. Cash and cash equivalents at the end of fourth quarter 2009 totaled $443.5 million.

Looking at our first quarter of 2010, we are guiding revenue to range from flat to 2% increase quarter-over-quarter. And we also expect our operating expenses to range from $84 million to $88 million. We have planned CapEx to range from $95 million to $100 million for the first quarter of 2010.

I will now hand the call back to Enling for the question-and-answer session of this call. Thank you.

Enling Feng

Thank you, Gary. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Operator, please assist.

Question-and-Answer Session

Operator

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

Randy Abrams – Credit Suisse

Yes. Hi, good morning. I wanted to see if you could elaborate on your CapEx plans. You mentioned $95 million to $100 million in the first quarter. If you could talk about total 2010 CapEx and the priorities for that spending, and then maybe mention how that will affect depreciation for first quarter and total year 2010.

David Wang

Okay. This is David Wang. The CapEx, we have $335 million. And about 72% will be buying the equipment. And more than 50% of these will be dedicated to advanced node for 12-inch. So we will all spend one-third -- two-thirds in the front and the second half will be another one-third. And if we add all these CapEx to the remaining depreciation amount, which will be still lower than the 2009 depreciation amount, by about 10%.

Randy Abrams – Credit Suisse

Okay. And if I could follow up on that, if you could talk about your fab expansion with 72% for equipment, what are your plans to ramp up capacity of your Beijing fab or new Shanghai fab?

David Wang

Well, it mostly will be in the Beijing fab 12-inch. Very little will be in Shanghai because the Shanghai is mega-fab for 8-inch. It is fully utilized and hard to expand at this moment.

Randy Abrams – Credit Suisse

All right. And if I could ask, the 65-nanometer, looks like it's starting to ramp up to 2.5% of revenue. If you could talk about the applications and customer breadth on 65-nanometer and maybe your expectation for what percent of sales or how that will ramp up through 2010.

David Wang

Okay. Q4 2009, the 65 share, about 2.5% of revenue, as you just mentioned. And I think the first half will be about mid-single digits, and at the end of 2010, we will reach double-digits, around 10% to 15%. Now, what are the products? The products mostly are the communication and consumer products that account for over 90% actually, set-top box, digital TV, wireless, and also the cell phone, consumer products.

Randy Abrams – Credit Suisse

Okay. And I guess the last question, just if you could give a sense for, as you ramp 65 and depreciation coming down, what is your expectation for breakeven utilization? Where can you take that as we move through the year?

David Wang

What we do today is we are trying to -- first, the executives are coming on board in a couple of weeks. We are -- first is doing an evaluation of every fab and seeing the ASP as well as the gross margin for all the fabs. It takes some time. And as you know, we believe it’s not just the utilization in the gross margin will make the break even, but many other parameters. And our COO, Simon, is very good at developing technology. So what we are trying to do is coming up a roadmap of technology advancement. So this will help increase the ASP. And also in the meantime, the fab operation people are trying to reduce the cost -- of manufacturing cost. So all these we will put together, so therefore it’s very difficult at this moment to tell you the breakeven, but we will keep in mind always the profitability is number one priority.

So I think if you [ph] give us a little bit of time, the next quarter earnings conference, we will certainly report you the progress for this quarter. And we will have a better understanding and clear numbers maybe in the future. Talking about gross margins, you know that Q4, we’re getting first time to the double-digit. And we will try to keep on the double-digit continuously with improvement throughout 2010 if the market can continuously perform as strong as Q1 for the entire year. Does that satisfy you?

Enling Feng

Randy?

David Wang

Randy? Hello?

Operator

Our next question comes from the line of Mr. Bill Lu with Morgan Stanley. Please proceed.

Bill Lu – Morgan Stanley

Yes, hi. Good morning. First of all, congratulations to David and the rest of the management team (inaudible).

David Wang

Thank you very much, Bill.

Bill Lu – Morgan Stanley

Hi, thanks. I guess, David, since this is your first conference call, if you look at your competitors, there is a pretty wide range of different business models for the foundries. Some are focusing on leading-edge, some are broad-based, some are focusing on just the trailing edge. When you look forward for SMIC, what do you think is the right business model for the company?

David Wang

Well, my belief -- first, my philosophies for high-tech industry or any enterprise, we need to build the company with solid foundation to be strong, first, before we expand and become bigger. That’s my philosophy. I think we sync with all the senior executives we recruited. So that’s one. So we will do things step-by-step. Certainly we cannot compete with them like $5 billion capital. But I believe if I use a -- so what we will do is, we will continuously doing right to build the competency of the company. And few things I want to address, although it’s not a direct answer to your question, but I think maybe in most of the people’s mind will ask these.

I think what we will do as a strategy, first, we want to add value to our customers, which means we will listen to our customers. We will develop at a faster rate to provide advanced technology nodes. We will improve cycle time yield and satisfaction through the service. So therefore the revenue will dramatically increase with a better ASP. The second thing we will do is, the bottom line, we have to reduce the cost. I’m talking not only the cost of manufacturing, I’m talking about cost reduction abroad. As you know, we spread pretty widely and we have today decided to do an organizational audit and also a little bit of restructuring to introduce a matrix organization. So therefore it can reduce the redundant and the overhead. That is very important. If I compare -- which you mentioned about other peers, if I compare with our cost, if I take the key [ph] company, 23,000 people plus another 3,000 that they are recruiting, but their revenue is eight times of ours. But in the meantime, our headcount is about 12,000. Now, if we compare with a new company, they are about same amount of headcount, but it’s about three times of our revenue. So therefore the cost reduction has become very important for us across the board.

And also another thing I think we want to do is we want to create a more cost conscious culture, accountability culture for the people, and the fighting spirit culture. I’d like to give you a story here. When I joined, the third week I found out we are still making DRAMs. And each wafer we make, we will lose more money. It did not cover the variable cost. So I asked the people, why are we making the DRAMs? People don’t really have a good answer. Some people say, well, that’s historically we’re doing, and other people say that it’s a good filler, because if we don’t have enough loading, we can use it as a filler. So I told them -- I said, you know, when you fight, you need to have your ocean behind. So you can only advance, you cannot retreat. So I think this kind of culture, because the difficult business we need to fight in the market. So those are today’s -- our mind, the executive determination to take care of these before we can really talking about we compare with the other large foundries. Certainly, we will benchmark with their performance, but that’s what I can tell you now.

Bill Lu – Morgan Stanley

Okay, great. That's very helpful. On the points that you made, you talked about a focus on cost, which is obviously very important. You talked about a centralized matrix organization. But if I look at, again, you versus your large competitors, you have fabs that are pretty decentralized, that are pretty spread out, versus most of the others are just into maybe a couple of key locations. Are there plans to change that?

David Wang

There is no plan to change. You cannot move out of a location. But the important is we need to come out with innovative ways. Okay? How do we transfer technology? How do we transfer the best new method? How do we communication better? That’s why I’m talking about restructure to get a better, more effective, efficient organization with a better communication. So those become very, very important. Another thing is, we also want to create some competition internally. But by doing these, we need to have a system and process in the company. For example, we need a P&L reporting system. Okay? We want everybody involved in business to understand the cost and profit.

So therefore we can have a comparison. We can stimulate the driving force and the motivation of people. So there is enough ways how do you harmonize -- unify the culture, which is important, because China is big. The West and the East, we have different culture. But we want to make this culture to become a company culture. So that’s what we are trying to do. I think we will solve these problems. Sometimes heterogeneous is better than homogenous. If we take US, the immigrants will help to stimulate more innovation. So we want to take advantage of these on the good side, but eliminate the problems in the different culture issue.

Operator

And the next question comes from the line of Mr. Dan Heyler with Banc of America/Merrill Lynch. Please proceed.

Dan Heyler – Banc of America/Merrill Lynch

Good morning, David and Gary. I (inaudible) questions. First on your -- following up on your strategy comments, I wanted to drill down a bit. The strategy, I think, that has been successful for some of the smaller foundries, is to follow more of a T-like strategy, being a fast follower and offering really a second source to the big guys. So UMC clearly is moving increasingly -- and probably has always been T-like, but increasingly in that direction. I'm wondering, given the recent settlement and lawsuit, how much -- how inhibited are you to remain a T-like strategy? Do you think you can still execute as a T-like or do you have to dip to vary your strategy and find a new partner or a new platform?

David Wang

Well, so -- I mentioned about a Chief Administrative Officer, also the Chief Legal Counsel, is coming on board. We will need to set up a policy, training process, procedural insight in SMIC. So we will make everybody aware of the value of IT and how to protect ourselves, how not to infringe others. So that part is coming -- is going. We actually have already few hundred finished training internally. So that part is important to rebuild our image of credibility and the image of trust. The second is, we are spending money and we’re spending effort and we are bringing more and more people that have experience in the technology development. We want to have our innovation, create our own technology. And in the meantime, we have the help from IBM. We purchased the 45-nanometer technology. And so therefore in the technology area, we are doing pretty well and fully protected.

So the other one is how to get market share and how to get more profit like the key company. We even don’t want to dream at this moment. It takes time. But I think we are the number one foundry with 12-inch capability and advanced technology nodes in China. We have better access to the Chinese market. And that helps a lot. Just to mention, the Greater China business is about 38% of our revenue in Q4. And just China alone is 24%. This, I think, no other foundry can compete with us.

Now, certainly the China market by the Chinese fabless company and also by Chinese design house is still not too big. But if you take the compound annual growth rate of fabless companies in China is 51% in the last five years. And it’s coming stronger. And their revenue today is $4.6 billion. It’s about 8% of the total worldwide $50 billion fabless revenue. Okay? So that’s our advantage. I don’t know. If any one of you speak Chinese, there is older saying in Chinese is “The water from the pavilion will see the moonlight first,” which really means a person, if in a favorable place, will be able to take the advantage. And I think this becomes a very important thing. This is the reason why all the other peers are trying to get some piece of land in here to do their business. So our expansion across China will help.

Dan Heyler – Banc of America/Merrill Lynch

Okay, thank you. I was specifically referring to the first source versus becoming a second source foundry. And I guess my question ties more to, to what extent would you want to become part of the IBM platform. I know you purchased that technology, which is slightly different than the others. So are you -- at what point would you make that decision where you would not consider that altogether, again, just becoming a full member of the platform, the ecosystem for, say, 40-nanometer and below?

David Wang

Okay. Yes, I mean, you have to start with some point. Right? So you have to get into the camp, but it’s not necessary, we are always in the camp, because China is getting more independent with its own standards. And we also will spend effort working with the network companies in China. And as you know, (inaudible) support from the government, local and central and institution and industry in here is enormous. So for example, we have 28-nanometer or 34 development projects with some player, people who joined the government in China and also 45 and the shrink [ph] 40 with IBM and ourselves. Even if we take the shrink 40 is not really exact IBM’s process because what we get is fundamental basic process of 45.

Dan Heyler – Banc of America/Merrill Lynch

Got it. Thank you. And then finally on the cost side, you have alluded to some opportunities to reduce cost. It looks like you see some significant opportunities there to drive down cost. Do you have any ballpark numbers, either you and Gary that you could talk about where we could see operating expenses this year?

David Wang

Yes. Gary, why don’t you answer to Dan.

Gary Tseng

Thank you. Dan, actually I’m not very comfortable to making any forward-looking number at this point since I’m here still counting on ours. So I would not really give a number, but if you look at the history, and David just mentioned all the people number, we really have a lot of room to many works and improve it. So I would say give us a little bit more time and we probably can give you a better idea on how far we can go. I feel so sorry for that, but hopefully I would be able to satisfy you in the future.

Operator

And the next question comes from the line of Michael Chou with Deutsche Bank. Please proceed.

Michael Chou – Deutsche Bank

Hi, good morning. Could you give us the number for your (inaudible) technology, 8-inch or 12 inch? Thank you.

David Wang

Could you repeat the question? I only got 8-inch and 12-inch, Mike.

Michael Chou – Deutsche Bank

I'm sorry. Could you give us a number, what kind of percentage you will increase for your capacity year-on-year for this year?

David Wang

Okay. I think the -- yes, the capacity increase almost all on the 12-inch, not on 8-inch.

Michael Chou – Deutsche Bank

But is that possible you can give us the number, what kind of percentage?

David Wang

Yes, yes, yes. We’re trying to increase -- we will increase the 12-inch Beijing from 20,000 to 25,000 at the end of 2010.

Michael Chou – Deutsche Bank

2010, okay. Thank you.

David Wang

And for the 8-inch, 8-inch, it’s only about 8% [ph] increase, but mostly it will be in Shanghai from 83,000 to 90,000.

Michael Chou – Deutsche Bank

Okay.

David Wang

Hello? Okay.

Michael Chou – Deutsche Bank

Yes, okay. My second question is, what is your strategy for 40, 45-nanometer going forward?

David Wang

40 and 45-nanometer, we are working in the last couple of years, we are working with some key customers in the US. And we already actually qualified the 45 simple enough. In the 40, we are developing some partnership with two customers working on these. But, however, we do not expect any revenue in 2010 coming from either 40 or 45.

Michael Chou – Deutsche Bank

(inaudible).

David Wang

I’m sorry. Mike, can you speak again?

Michael Chou – Deutsche Bank

Yes. When will be the earliest mass production for 40-nanometer? Would that be first half of 2011 or 2011?

David Wang

I will say the 45 will be in 2011. But 40, I cannot tell you now for sure.

Operator

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

Steven Pelayo – HSBC

Great. Thank you, and congratulations. It sounds like you are expressing a lot of confidence here on reaching a target of sustainable profitability. I'm looking forward to that. Your guidance for Q1, does that imply an increase in capacity utilization rate and/or ASP? What's implied in a flat to slightly revenue growth guidance?

David Wang

The Q1, because these days if you purchase equipment, it will take some time to get delivered and installed. So in Q1, it will be minor modification of the capacity. The capacity modification ramping will be the second half mostly. And utilization is pretty high across the board. But you know, we are balanced these utilization with the cycle time because we want the customer happy with a better cycle time. So therefore we are not pushing utilization to 100%. We want to leave room to help to getting a satisfactory cycle time. And however, in every fab we have is all filled up.

Steven Pelayo – HSBC

So I guess that (inaudible) capacity in the second half of the year, utilization rate is already pretty high, that your flat to up guidance is really more ASP from (inaudible) mix? Do I understand that correctly?

David Wang

Correct, correct. Yes, the product mix and how do we select products. And also -- Chris Chi -- maybe Chris can give you a little bit about sales and marketing because he is trying to discipline the organization with a better awareness of the ASP. Chris?

Chris Chi

Hi, Steve, this is Chris Chi. Allow me to address the question from a market point of view. The first improvement will come from filling up all the corners and spaces we can find in our fab and therefore increase the utilization rate a little bit further. Second, we are focusing on reducing the low margin businesses such as DRAM, which allow us to transfer some portion of the capacity to make a higher ASP product. And third, according to our current status, our majority of the capacity booked now is from our 12-inch. And 12-inch has a higher -- how to say, higher ASP or higher -- more advanced technology node. So it is an enhancement to our revenue. That’s my answer to you. I hope that would be satisfactory to you.

Operator

And the next question comes from the line of Eric Chen with BNP. Please proceed.

Eric Chen – BNP

Yes. Good morning, David, Gary, Chris, Enling. I would like to cut it shorter in terms of your China client. And you mentioned that 38% of your total wafer shipment for your China client in Q4. And how much the revenue, the percentage from your China client at the same time [ph] in Q4, year 2009?

David Wang

Okay. 38% is the Greater China.

Eric Chen – BNP

Okay.

David Wang

Greater China certainly has Taiwan. So if you separate China itself, Mainland China is about 24%.

Eric Chen – BNP

24%. So that means Taiwan might get 14%.

David Wang

Yes. Correct.

Eric Chen – BNP

Okay. And how about the revenue portion from your China client?

David Wang

Yes. That’s what I’m talking about revenue.

Eric Chen – BNP

Okay. Not wafer shipment?

David Wang

24% of the revenue, not the shipment.

Eric Chen – BNP

Okay, not the shipment. Okay. And would you mind to give us an idea on your China client? And in terms of their product and in terms of the business growth potential, how many percentage of revenue do you believe will from your China client as at the end of this year, that's at Q4, year 2010?

David Wang

Okay. I will give you what I think we should going forward. But later I want is to give you some more detail. SMIC after all is still international company. And although today the China market grows faster than outside, but if once we get the certain size, we still want to have a balanced share of customers worldwide. For example, we don’t want 50% of all company from China. Okay? So -- but however, today we do have a better market share. I think that today we are almost 50% market share of the domestic Chinese customers among all the peers worldwide. Okay? And there is certainly advantage of having these, because first, China economic growth is outgrow the rest of the world. So there -- and also the seasonality in China is not the same as Christmas for the west world because the Chinese New Year is big consumption. So therefore it plays as a buffer for us. So we will also have advantage, but again, as I just mentioned, we want to grow proportionately to the worldwide market, but with a preferred, a better Chinese market share than others. Chris?

Chris Chi

Hello, this is Chris Chi.

Eric Chen – BNP

Hi.

Chris Chi

I could give you a broader perspective about the China market. First of all, we have noticed that the Chinese fabless customers after a large boom in the early 2000s. The numbers reached up to 500. And in the past ten years, they have gradually evolved, emerged and some becoming a significant size. So we are happy to see some of our customers grow in a large way. So that’s one factor. The second factor is, in my opinion, that the recent announcement of the technology force, namely the ability to go IPO, which allows a capital formation for our fabless customers in China. This is helpful, because in the past, they have been relatively small and weak financially. And so I think going forward we have seen a much stronger growth in our China customer base, both in terms of size and financial health. And also the domestic market consumption is very healthy. So we are very optimistic with this segment. Thank you.

Eric Chen – BNP

Okay. Can I follow up? What kind of product do you think is very potential and what kind of product you have with a very big border [ph] today for your China client? Thank you.

Chris Chi

I’m hesitating in being customer specific. And we have -- really across the board, also in terms of consumer electronics and the 3G area, digital TV and hand phone, set-top box. So it’s pretty much across the board. It’s supported by the domestic consumption. So this is very noticeable. This is not necessary for export purpose. This is for domestic consumption.

Eric Chen – BNP

Okay. Thank you. And my other question is regarding to your operation. A lot of questions talking about the efficiency and your strategy and what's the trend in your company going forward. I would like to go very straightforward, and I know you got Simon Yang from the Chartered. And any change on the management team on R&D and the sales and how you combined the old team with the new member, and more specific (inaudible). Thank you.

David Wang

That’s interesting question. But if you know the history of Simon, he is one of the key persons created the bright future of SMIC in the first few years.

Eric Chen – BNP

Yes, I know that.

David Wang

Okay. He was responsible for technology development, responsible for manufacturing with copper [ph] line. And he made the yield, in the early time in here, even better somehow than the customer, internal manufacturing. So anyway, in short, he knows most of our people here. They work together. Okay? So he came in without having any problem, very easy to merge together. And today he is not here because he is visiting old locations, talking to his people. I don’t anticipate any problem. And it’s -- after all, it’s a small world, as you know.

Eric Chen – BNP

Okay. Okay. The very last question, very quick. I would like to make clear in terms of your capacity growth, how many percent growth year-on-year in the year 2010, and in terms of the total wafer capacity, how many percent year-on-year growth in the 12-inch fab in terms of year-on-year growth. Thank you.

David Wang

Okay. You know, nobody has a crystal ball. It’s very hard to give exact number. But as we know, the IC Insight predicted the semiconductor industry probably will grow up on a 15% average rate. And foundry industry may grow 20%. And we today have the best team, and as I mentioned, we have all 50 years experience in foundry operations. And we have ambition certainly to outgrow the foundry growth rate. But to what exact number, I cannot tell you, but we will work hard.

Operator

And the next question comes from the line of Mr. Rick Hsu with Nomura Securities. Please proceed.

Rick Hsu – Nomura Securities

Yes, hi. Good morning, David, Chris, Gary, and Enling, and happy New Year.

David Wang

Thank you, Rick.

Rick Hsu – Nomura Securities

Yes, thank you. I just got three kind of housekeeping questions. I remember a quarter ago, you -- the old management mentioned about getting sort of an R&D subsidy from the government. So my first question is, did you get any subsidy from the government in Q4?

David Wang

No.

Rick Hsu – Nomura Securities

Thank you. And --

David Wang

Yes.

Rick Hsu – Nomura Securities

Yes, go ahead.

David Wang

No, no. Please ask question, I will answer.

Rick Hsu – Nomura Securities

Okay, yes. All right. That's clear. The second question is, when I look at your Shanghai capacity in Q4, it was actually down from Q3, down to about 85,000. So what was the reason?

David Wang

Because I terminated a DRAM operation. It’s my first job this year. Still there? Rick?

Operator

And he withdrew from the queue. The next question comes from the line of Pranab Sarmah with Daiwa. Please proceed.

Pranab Sarmah – Daiwa

Hi. Thank you for taking question. This is Pranab from Daiwa Securities. Good morning, David. A couple of questions.

David Wang

How are you?

Pranab Sarmah – Daiwa

I'm fine. 20 years as a CEO, what are the key performance indicators you will monitor foundry for your company going forward for the next one year? As investors or outsider, we should also keep on those parameters.

David Wang

Okay. I will monitor everything, so to speak. And we have regular staff meeting every week about two hours. And before the staff meeting, I have another two hours, I call it executive report, mostly coming from the corporate planning group, which means the corporate planning group will give us a lot of data, integrating the meaningful data about the company, the utilization rate of each fab, the product mix of each fab, the cost of manufacturing each fab, and also the customer market movement. So I think I will monitor everything. And we are trying to also later on, to have a performance review for all the management and above, and with all the performance index. So the cost certainly is an important one to monitor. And also the quality and also the financial index -- and Gary is going to have a monthly financial business operation review. So we are going to very systematically monitor all the important index, which can drive to a profitable company.

Operator

Ladies and gentlemen -- ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would now like to hand the call over to Mr. David Wang for any closing remarks.

David Wang

All right. Thank you very, very much for joining us on today’s earnings call. And we really appreciate your continued patience, support and trust. Since we are a new management team, we need your support and we will earn the trust from you. And we look forward to providing continued update in the quarters ahead. Thank you for joining us and happy Chinese New Year. Bye-bye.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. Have a great day.

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Source: Semiconductor Manufacturing International Corporation Q4 2009 Earnings Call Transcript

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