Executives
En-Ling Feng – Director, IR
Gary Tseng – CFO
David Wang – Executive Director, President and CEO
Simon Yang – COO
Chris Chi – Chief Business Officer
Analysts
Randy Abrams – Credit Suisse
Bill Lu – Morgan Stanley
Dan Heyler – Banc of America
Steven Pelayo – HSBC
Semiconductor Manufacturing International Corporation (SMI) Q1 2010 Earnings Call Transcript May 11, 2010 8:30 AM ET
Operator
Welcome to the Semiconductor Manufacturing International Corporation's first quarter 2010 webcast conference call. Today's conference call is chaired by Dr. David N.K. Wang, Chief Executive Officer and President; Mr. Gary Tseng, Chief Financial Officer; Dr. Simon Yang, Chief Operating Officer; Mr. Chris Chi, Chief Business Officer; Barry Quan, Chief Administrative Officer; and Mr. En-Ling Feng, Director of 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. En-Ling Feng, Director of Investor Relations for the cautionary statement.
En-Ling Feng
Good morning and good evening to everyone. Welcome to SMIC’s first quarter 2010 earnings conference call. For today's call, we have our CEO, David Wang; our CFO, Gary Tseng; our COO, Simon Yang; and our CBO, Mr. Chris Chi; and our CAO, Mr. Barry Quan.
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 which provided as follows. SMIC's statements of its current expectations are forward-looking statements, subject to significant risks and uncertainties. The actual results may differ materially from those contained in such forward-looking statements. Information as to those factors that could cause actual results to vary can be found in SMIC's Form 20-F filed with the United States Securities and Exchange Commission on June 22nd, 2009.
For today's agenda, CFO, Gary Tseng will highlight our first quarter 2010 financial results and the second quarter 2010 guidance. Following that, our President and CEO, Dr. David N.K. Wang will speak on SMIC’s key initiatives and comment on our business. Then we will open the call for Q&A.
I will now turn the call over to Gary.
Gary Tseng
Thank you, En-Ling. Good morning and good evening to everyone. I would now take a few moments to highlight our first quarter 2010 financial results and give our second quarter 2010 guidance. Please note that all currency figures are in U.S. dollars, unless otherwise stated.
In the first quarter of 2010, total revenue exceeded our original guidance and increased by 5.6% to $351.7 million from $333.1 million in fourth quarter 2009. Wafer shipments were 455,000 8-inch equivalent wafers, sequentially up 4.2%. Gross margins further improved to 14.6% in the first quarter of 2010. The increase was due primarily to an overall increase in fab utilization, wafer shipments, and ASP.
Total operating expenses decreased to $79.5 million in first quarter of 2010 from $622.2 million in fourth quarter 2009. This was due primarily to costs associated with the litigation settlement, impairment charges related to the agreement and the provision for long-term receivables. If I take this one-time charge away, the loss will be somewhere around $88.5 million.
The net loss was $181.9 million in the first quarter of 2010 compared to net loss of $617.7 million in the first – in the fourth quarter of 2009. Most of the first quarter 2010 net loss is the $146.6 million charge change in fair value of our commitment to issue shares and warrants under the 2009 litigation settlement. Without this non-operating one-time charge, the net loss will be $35.3 million.
Moving forward, depending on future fluctuation in the share price of SMIC, we may incur additional gain or loss to reflect changes in value and give shares and warrant (inaudible) issue following necessary government regulatory approval. For the fourth quarter, if I take the one-time charge away, the net loss will be somewhere around $44.3 million. Fully diluted EPS was negative $0.41 per ADS in first quarter 2010 compared to negative $1.38 per ADS in the previous quarter.
Looking ahead at our second quarter of 2010, we are guiding revenues to range from 3% to 5% increase quarter-over-quarter. We expect our operating expenses, excluding foreign exchange differences, to ranging from $80 million to $84 million and we plan CapEx to range from $150 million to $200 million.
I will now hand the call to David to outline SMIC's key initiatives and to comment on our business. David?
David Wang
Thank you, Gary. Good morning and good evening to everyone. Thank you for joining us for our earnings webcast.
First, I want to update you on our new management team. Our senior executive team now includes the following officers. Chief Operating Officer, Simon Yang; Chief Business Officer, Chris Chi; Chief Financial Officer, Gary Tseng; and Chief Administrative Officer, Barry Quan. Barry joined us most recently and will be responsible for legal, HR, and other administrative and support functions. This senior executive team is now complete. Each officer is evolving his own team and remains fully accountable for its performance.
Next, I would like to update you on our recent performance. In the first quarter of 2010, our ASP improved due to better product mix. Our utilization improved to 92.1% and our gross margin improved to 14.6%.
Regionally, North America and China again accounted for most of our revenue and quarter-over-quarter growth. North America contributed more than half of revenue and 10.2% of growth, and China contributed almost one-fourth of revenue and 17.6% of growth.
Our revenue for 90-nanometer and below technologies improved by 14.3% last quarter. We have begun internal restructuring by strengthening the organization and by introducing new incentive programs into our compensation structure to increase motivation, efficiency, and accountability.
Our senior executive team has just finished the initial round of restructuring, and we are seeing results. Many departments have been eliminated or streamlined for more effective execution as our workforce has become leaner by more than 700 people including many at senior levels, affecting 25% of our senior management.
Our performance has improved. Our customer feedback has been good and strong. Our gross margin has been improving and so has our cash position. We remain dedicated to achieving our top priorities of sustained profitability.
Finally, I would like to highlight our current plans. Regarding technology, we are focusing on our core strength of logic manufacturing as we work to narrow our technology gap with the leading foundries. We will continue to obtain top engineering and R&D talent. We are prioritizing our 65-nanometer technology, particularly at our Beijing facility. We also continue our 45-nanometer development, targeting mass production for second half of next year as we make our next steps for 32-nanometer and beyond.
Regarding business development, we will partner with global fabless and IDM companies to bring more advanced nodes into production next year. At the same time, we will cultivate more high potential domestic customers to capture the highest growth opportunities in China.
Among other improvements, we will substantially upgrade our companywide systems, including IT, procurement and supply chain management and aggressively pursue cost controls across the board. Our sales teams are moving closer to customers to provide a better and faster service. We also are accelerating our IP investment to better support our fabless customers. We plan to leverage the semiconductor up-cycle to strengthen our market position and the relationships with customers.
In conclusion, the foundry market looks positive. We continue to see uptrend in the second quarter and remain cautiously optimistic about the third and fourth quarters. We will continue our organizational and business enhancements and look forward to updating the investment community regularly. We appreciate your support. Our top priority of sustainable profitability remains unchanged and we will strive to enhance SMIC’s fundamentals for further expansion.
I will now hand the call back to En-Ling for the Q&A session of this call.
En-Ling Feng
Thank you, David. 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. And operator, please assist. Thank you.
Question-and-Answer Session
Operator
(Operator Instructions). And we will now pause for a moment to compile a list. Our first question comes from the line of Randy Abrams with Credit Suisse. Please proceed.
Randy Abrams – Credit Suisse
Yes. Hi, good morning. The first question just on your capital investment plans, it looks like you'll need two-thirds of your total budget in first half. I want to see if you still have the same CapEx outlook for second half. And on a broader perspective, I want to see if your strategy is still to stay light on CapEx and improve profitability, or do you think you need to expand more aggressively to get better economies of scale?
David Wang
Well, Randy, this is David Wang. Our CapEx has been set at $335 million at the beginning of 2010 and I reported to you guys last quarter. And this money are front-loaded and certainly, we are very carefully reviewing the situation. If the second half remains as strong as the first half, then we may have to adjust the capitals.
Randy Abrams – Credit Suisse
Okay. And maybe to follow up on that, if you could go through what the plans are as far as what you are thinking about for second half in that upside scenario. And second question I had was for 32-nanometer, I know you are moving to the IBM camp on 45, but I want to see if you are considering pursuing that approach while looking at the options between gate-first, gate-last. You also mentioned partnering with IDMs and fabless for future technology. So if you could go into the potential plan of CapEx and then for 32-nanometer, your strategy?
David Wang
Okay. And for production, we will not have the 32 next year. But for the technology wise, I like to have Simon Yang to give you a – some kind of briefing on our technology roadmap. Simon?
Simon Yang
Thank you, David. Hi, Randy. Clearly, I think in terms of our technology status at this time, we are behind some of our peers, and clearly, we are working very hard to narrow the gap. So our current target is that by the end of this year, we would like to reach a stage of freezing [ph] our 45 and 40-nanometer technology and start to enter pilot with customers and continue to set our goal to reach volume production with 45, 40 in the second half of next year.
And for 32, 28-nanometer technology, we are putting together a plan and we will initiate a program before the end of this quarter. We target to capture majority of the customers in the space. While we are very rapidly strengthening our internal R&D capability, we will not rule out forming potential partnership with industry leaders. (Multiple Speakers)
Randy Abrams – Credit Suisse
Okay, good. Thanks for that. And if I could follow up just on the revenue guidance, it looks like first quarter, you were a little stronger than peers. But second quarter, a bit more conservative on the 3% to 5% guidance. If you could go into – is there any – is any of that to do with capacity constraints where you are forced to give up some business now due to capacity tightness or is there other factors on your revenue, I think, you are seeing within the end markets that you supply into?
David Wang
Yes, it is capacity limited.
Randy Abrams – Credit Suisse
Okay. Which nodes are you capacity limited?
David Wang
4, 8-inch, everything.
Randy Abrams – Credit Suisse
Yes, okay. Okay, all right. Thank you.
Operator
Our next question comes from the line of Bill Lu with Morgan Stanley. Please proceed.
Bill Lu – Morgan Stanley
Yes. Hi, good morning. My first question is on gross margin. Certainly, it was quite good in the first quarter and you had talked about improvement in pricing and utilization rate has grown. That – yet, if I look at the financials, I think 1Q basically was up about 1%, utilization rate up about 0.6%. So I'm wondering if you could talk a little more about maybe what's behind that and then can you also talk about how we should about margins going forward?
David Wang
Well, the improvement of margin coming from several reasons. First, you mentioned about ASP, about 1.4% increase. Also, utilization is close to 1% increase improvement. Also, there are some reduction of the depreciation from Q4 to Q1, okay? So therefore we reached 14.6%. And we will maintain this double-digit with some improvement for the last half of the year.
Bill Lu – Morgan Stanley
Okay. Going back to the previous question, I guess, what you had said is you are essentially capacity constraint right now, right? So I know, David, you've talked about not wanting to run full, 100% because you want to make sure your cycle time is reasonable. Is kind of 92% or that range about where you want to run? How high can you go, I guess, is the question.
David Wang
Well, this question, I think Simon can give you a better answer. He is also responsible for the operation of the fabs, the utilization, how much we can push out without sacrificing the cycle time.
Simon Yang
Yes. I think our new methodology is that we definitely want to maintain our operation quality and the delivery schedule, while pushing up the utilization. You may know that the utilization definition may vary from company to company, it's based on the definition of capacity. For us, it is impossible to reach 100% because all the bottlenecks will be running non-stop. So with David's support, we did structure a special bonus. With that, we look forward to increase the utilization level by a few percentage points.
Bill Lu – Morgan Stanley
Sorry. Just want to clear – that would be few percentage points for 1Q level or what do you mean by that?
Simon Yang
I think whether we measure by one month or one quarter probably doesn't matter as much. But we target to achieve probably around 94% to 95%.
Bill Lu – Morgan Stanley
Got it. Okay. If I could just ask one last question, how should we think about the OpEx going forward? It was low in the first quarter, looks like it's going to go up a little bit in the second quarter. David has talked about hiring some R&D and engineering resources going forward. How should we think about OpEx overall?
David Wang
The pay packs mostly dedicated – OpEx? Okay, why don't you answer it, Gary?
Gary Tseng
Okay. This is Gary, Bill. On the first quarter, lower in OpEx, some part of reason because the R&D wafer start is lower than we originally planned. So this below $80 million bottom line we targeted for. As we – in the second quarter's guidance, we are still targeting for $80 million to $84 million. This is still our medium-term OpEx target. We believe we should be still maintain at this level.
So when we are restructuring the organization, improving the whole business process, we expect to make a big step through engineering on everything, which we'll need to spend more money on a lot of IT structure and so on. At the same time, we would expect being able to visualize [ph] the whole process, reducing more headcount. But all in all, I would still believe in the short term, we will still maintain an $80 million to $84 million will be the right target for SMIC for the time being. Thanks.
Bill Lu – Morgan Stanley
Okay, great. Thanks a lot.
Operator
Our next question comes from the line of Dan Heyler with Banc of America. Please proceed.
Dan Heyler – Banc of America
Good morning, guys. This is Dan Heyler from BofA-Merrill Lynch. Thanks for taking my question. I had two questions, first on the capacity expansion plans and tightness. You mentioned you are tight across all the nodes. We've – we also understand that things are very tight on 200-millimeter in the industry with companies saying they are missing numbers because of lack of capacity. I was wondering if you would explore the option of better leveraging the opportunities in Wuhan and Chengdu, if there is capacity there that could be better utilized or not.
David Wang
Yes. Wuhan is 12-inch fab.
Dan Heyler – Banc of America
Yes.
David Wang
Chengdu is 200-millimeter. But Chengdu today is all full. There is no place we can squeeze in anymore. So we have a little bit of expansion in Tianjin and Shanghai, but that's only a couple of thousand wafers per month. So with increased utilization for another few percentage and a few thousand wafer increase, I think we will be okay for the coming quarter.
Dan Heyler – Banc of America
Yes. Is there an opportunity to bring those operations back into SMIC for management to consolidate those fabs to make them more efficient? And also on Wuhan, I guess, I'm wondering what's going there on the 8-inch.
David Wang
Okay. Simon, you want to make comment on the more efficiency of the fabs?
Simon Yang
Yes. From operation standpoint view, we treat every fab as SMIC fab. And the coordination is unified under a central management. For Wuhan, as David said, it's a 12-inch operation, but Wuhan is also full, even though the capacity is quite limited.
Dan Heyler – Banc of America
Okay. And 8-inch fab is full as well?
Simon Yang
Yes.
David Wang
Yes.
Dan Heyler – Banc of America
Okay, great. So there would be no incremental improvement there basically and if you were to merge those fully under your own balance sheet once again? Okay.
David Wang
At this moment, yes.
Dan Heyler – Banc of America
Got it. Okay. And then my second question was on getting a little more color on the operating expense. It sounds like you are doing a lot to streamline your operations to make them a lot more efficient and reviewing those processes. And on the other hand, you see opportunities to spend in IT and procurement and other selective areas.
So are you thinking about – it seems as though there is a balance going on here; one, you need to make expenditures, but B, you are trying to offset that. So as we look at second half, should we think that you are keeping OpEx relatively flat from current levels? Is that a target or do you think it needs to grow in the second half of the year because of the R&D needed for 40, 45 and the tape-outs that are going to be needed there and plus the R&D in 32? So I'm wondering how much OpEx would need to increase in second half to meet some of these business objectives.
David Wang
Dan, I want to address the first portion of your question and then forward to Gary to give you more detail in numbers.
Dan Heyler – Banc of America
Okay.
David Wang
I think some investment is extremely important for us to build the core competence. For example, the IT, you put some money, but later on you can get a big return in terms of efficiency in the fab operations, as well as the business process and operations for the supply chain management. So that money, we believe, we need to invest and it's not really huge amount of money.
Another thing we need to invest is to really organize well of the procurement department, because when you select equipment, if you are not careful, the equipment lifecycle time is short. And if you are not really carefully selecting equipment for the particular applications for your customers and then you can become a waste. In the past, we had a lot of equipment dedicated for DRAM applications as example. That's why we have impairment in the past.
So today, we are trying to build our strong operational organization, as well as the IT and other systems in the company. The target is eventually, we can make profitable company and I think this – that’s what we are willing to do. Now, Gary, you want to talk about detail?
Gary Tseng
Well, I probably won't be able to give you exact number of what we are shooting for. But one thing for sure is we are focusing [ph] the whole company in term of every aspect from the people doing the work, from the culture, we target the problem, and even what we just mentioned in terms of how we control R&D.
Simon Yang is implementing a very focused program review in each R&D program for the return on investment. As you can feel from the previous – the issue we addressed, we're really trying to get the whole organization focused on efficiency, effectiveness, and accountability on every individual.
This is going to take time; this is not a one-quarter, two-quarter events. But we believe toward the end of this year, beginning of next year, this company will be quite a different company from six months ago. So again, without giving you a very specific number as we are working on every aspect trying to improve everything, I would say we need more time to put everything together to make it a – have a good result. Thank you.
Dan Heyler – Banc of America
Okay, thank you. Thank you, David and Gary. I'll get back in the queue for more questions. Thank you.
David Wang
Okay, Dan.
Operator
(Operator Instructions). Our next question comes from the line of Steven Pelayo with HSBC. Please proceed.
Steven Pelayo – HSBC
Great. Thank you. I'm curious if you could just – I think last quarter, you talked about a small percentage – a couple of percentage points of 65-nanometer in 4Q. What was it in first quarter and then maybe your outlook for 90-nanometer and 65-nanometer in the second quarter and by the end of the year?
David Wang
Okay. I will like to have Chris Chi to answer this question, because it is also related to the business.
Chris Chi
Hi, Steven. This is Chris Chi. Allow me to answer your question regarding 65-nanometer. We have in the previous quarter a high 2-point – 2 percentage point of revenue goes to 65, and from Q-to-Q, we have a slight drop on this percentage, partly because of our very narrow customer base and this is what we are looking to improve to expand our customer base so that we can have a more increased revenue.
Steven Pelayo – HSBC
And targets for 2Q and by the end of the year?
David Wang
I think the end of the year, we are shooting for a high-single digit. Also –
Steven Pelayo – HSBC
Okay. And I guess I just wanted to – go ahead.
David Wang
Steve, also the capacity will be increased too for 65, because as I mentioned, capital is front-loaded and some of the equipment will be in second half. So it's somewhere about 3,000 to 5,000 wafers per month more for 65-nano for the second half.
Steven Pelayo – HSBC
Okay, 3K to 5K. And so if think about it just in terms of 90-nanometer and below, you have about 20% of revenues in the most recently reported quarter. How do you see 90-nanometer and below tracking in 2Q and through the end of the year?
Chris Chi
This is Chris Chi again. We have a very strong business behind the 90-nanometer. So our increase in percentage for the nodes below 90-nanometer is mainly coming from the 90-nanometer. And so far, we are doing reasonably well and our customer base is expanding in the 90-nanometer node.
Steven Pelayo – HSBC
Okay, fair enough. If I can move on just to a couple more quick questions. Your depreciation on your cash flow statement did in fact decline quarter-on-quarter. But actually the depreciation in the cost of goods sold increased quarter-on-quarter. So I'm trying to focus on your gross margin opportunities there for further increases, so that depreciation in COGS is most important. Could you talk about how that's going to trend in the second quarter and through the end of the year and really focus on the COGS depreciation for 2010?
David Wang
Okay. Last quarter, we mentioned about 15% to 18% year-over-year reduction of depreciation, which is the – totally we have a depreciation $643 million. So that will be a reduction 15%. And Q1 is about a drop, 5% and another 4% and another 5.5%. So each quarter, averagely, about 5% dropping in the depreciation.
Steven Pelayo – HSBC
Correct. In the total depreciation reported in the cash flow statement. But actually depreciation shown in your cost of goods sold, that portion increased quarter-on-quarter. And so that's the one that really drives the gross margin number. I'm trying to understand where that portion of depreciation is going to track through the rest of the year.
David Wang
You mean, the depreciation at the section of cost of control – I mean, cost of goods sold?
Steven Pelayo – HSBC
Correct. It went from $142.2 million to $144 million quarter-on-quarter. I'm trying to see when – how that's going to decrease going forward. I was actually thinking it was going to decline in Q1, so I was a bit surprised. That's okay. We can take it offline.
Last question is really just a bigger-picture question. I really like your guys' strategy to find sustainable profitability. I want to try to get some numbers on that. So can you talk about the revenues required, what the mix would need to look like for you guys to do about a 20% gross margin? I mean, maybe let me put it another way, $400 million in revenue to 20%, it's about $80 million in gross profit, $80 million in OpEx gets me breakeven on the operating profit. Is that what I should be thinking about or – help me understand what you guys think is necessary for a breakeven operating profit number.
David Wang
I think at this moment, it's safe to stay around 25% gross margin.
Steven Pelayo – HSBC
Okay. What revenue level or mix would be required, you think, to do that?
David Wang
Like today's revenue.
Steven Pelayo – HSBC
Okay. So you think even at today's revenue level you guys can have – well, I think, about 10 percentage point higher gross margin than what you just reported?
David Wang
Hopefully.
Steven Pelayo – HSBC
Okay. And would you – ?
David Wang
Yes. Steve, you never can tell.
Steven Pelayo – HSBC
Yes.
Gary Tseng
The economy is the biggest wildcard to our target to turnaround. (inaudible) predict it. So if the second half remains as strong as today in the IT sector, we may have a chance.
Steven Pelayo – HSBC
Okay. And last, just a housekeeping question, what was the headcount at the end of 2009 and where is it today?
David Wang
Okay. I do have a number. Give me just a moment.
Steven Pelayo – HSBC
I guess you said it was down 700 in Q1 –
David Wang
Yes. Today, we have 9,176. And if I take the first day when I came to the company, was 9,892. So it's a reduction of 716 people in less than six months.
Steven Pelayo – HSBC
Great.
David Wang
In the meantime, we are increasing our revenue. So I think we are getting into a more effective and efficient in operation.
Steven Pelayo – HSBC
And where do you think your headcount is at the end of the year? Last question from me.
David Wang
That's hard to say. If – maybe add a few hundred people.
Steven Pelayo – HSBC
Okay. So you add some, you don't think it goes significantly lower than this 9,100 right now or 9,200?
David Wang
It really depends on the business.
Steven Pelayo – HSBC
Okay. Great, I'll get back in the queue. I appreciate it, guys.
David Wang
Okay.
Operator
Our next question comes from the line of Dan Heyler. Please proceed.
Dan Heyler – Banc of America
Thanks, I just had a follow-up. If you could give an update on the lead times for the – for your equipment, 65 and then if you do need to raise your CapEx, what kind of lead time – delivery times would you expect, on the litho specifically?
David Wang
Well, you really know our headache. I think the scanner is the difficult one. All of the rest, we don't see the problem, okay? And so far, the lead time of scanner is supporting our planned capacity expansion for this year. So we do not have problem. And going to next year, there is still more than six months. So I do not believe we will have a problem if we want to expand our capacity for 2011. Does that satisfy your question?
Dan Heyler – Banc of America
I understand. Okay. So what you are saying, your – I mean, I guess what I'm trying – yes, it does answer my question, but I wanted to get a sense of to what point do you really need to make a decision on fourth quarter capacity, whether there is upside or not? It sounds as though you need to make those decisions within the next month or so, am I right, on whether you want to expand for the fourth quarter? So we are getting –
David Wang
Yes. (Multiple Speakers). We already made the decision for the fourth quarter capacity.
Dan Heyler – Banc of America
Yes. But if there was upside under the upside scenario from your $335 million CapEx number, if you wanted to up that number because you felt business was stronger, you would have to do that, say, by June, am I right to get that?
David Wang
Correct.
Dan Heyler – Banc of America
Probably not that much upside? Go ahead.
David Wang
Yes. We are not just try to catch up every opportunity. We – this year, if we do a satisfactory presence in the market, making a good customer partnership, strengthen our operations, deliver better quality and service, and that's really our goal for 2010. We are not trying to increase the 5% or 10% more of revenue, because the market is better there.
Dan Heyler – Banc of America
Great. Thank you. That makes sense. And finally on the longer-term view on 8-inch, it doesn't seem as though any of the foundries are interested in adding 8-inch yet. It appears that the LCD driver business, particularly driven by strong digital TV, LCD TV market in China and other applications. I'm wondering what your long-term view on 8-inch capacity expansion is and whether you'd be willing to add more capacity on 8-inch to suit the high-voltage products.
David Wang
Yes. I think it's many of the consumer products growing very fast in China. It’s a 30%, 40% increase year-over-year, the demand, like even the CMOS sensor, and in addition to LCD driver, LED driver or power management parts. And as you know, the fabless company in China, mostly 8-inch demand. So there is a need to expanding 8-inch, but one has to be very careful, because you build a 8-inch fab, you have another depreciation. So we are doing this very carefully, but I want maybe Chris can address even more deeper about the market in the 8-inch in China.
Chris Chi
Hi, this is Chris Chi. We certainly noted that there is a (Technical Difficulty) particularly from China domestic market, and driver is part of that. As David alluded to, it's not the only one. So in general, 8-inch is very strong. However, in the past, the 8-inch business seems to be on the assumption of depreciate 8-inch fab and therefore, it's become more difficult to expand that 8-inch capacity under that financial model. So I believe as the market and the supply will eventually balance itself and we are working on the 8-inch expansion and to support the domestic market.
Dan Heyler – Banc of America
Okay, great. And a quick follow-up on that. Thanks, guys. That's helpful. You had mentioned power management and analog. Do you have exposure to the power management and analog market at this point and is that a market, if not, that you would further invest in?
Chris Chi
We have a very high presence in power management market. I wouldn't call it exposure. Exposure means risk. We have analog, we have several programs in the areas of BCBs and power MOSFETs. So we have a pretty wide spectrum of product portfolio in 8-inch area. And we've got a very good position.
Dan Heyler – Banc of America
Thanks a lot. And where would you be in relation to competitors in that market, because it's – there are a number of niche players globally in the analog foundry market and there is certainly an interest from others, TSMC and Vanguard, to expand presence there. So where would you say your competitive position is in this market?
Chris Chi
I think the – our competitive advantage is being a very large domestic market and we can support it with a shorter supply chain. So everything else is being equal, we have that advantage.
Dan Heyler – Banc of America
Great. Thank you, Chris. Thank you, David.
Operator
Our next question comes from the line of Steven Pelayo with HSBC. Please proceed.
Steven Pelayo – HSBC
Great. I'm wondering if you could just spend a moment just talking about your capacity movement through the rest of the year. Obviously, you saw the pickup in Beijing here in Q1. How does that track through in Q2 and in the remainder of the year?
David Wang
Well, we have fabs in Shanghai, we have fabs in Tianjin, we have fabs in Beijing and Wuhan, Chengdu. Let me give you some numbers. For 8-inch, we are going to have some increase. In the end of year, the Shanghai will be from 85,000 to 86,000 wafers per month, 8-inch. From Beijing, 12-inch will be 20,800 to 25,000 into the end of 2010. Tianjin fab, is another 8-inch, will increase from – almost no increase, still stay with 34,300 wafers per month.
Now, the Shanghai 12-inch is mostly for the R&D, well, a little bit increase from 1,800 to 2,500 wafers per month. So actually in Q2 compared to Q1 is very little increase. Only the second half will be some increase in both 8-inch and 12-inch.
Steven Pelayo – HSBC
Okay. And your ASPs were up, I think you said 1% to 2% or so on the strong growth in 90-nanometer. I'm curious if there was also any improvement in like – for like pricing, not just on mix richening. And then what's your outlook for ASPs in the second quarter? Do you think those continue to grow sequentially?
David Wang
You want to –
Steven Pelayo – HSBC
Yes.
David Wang
Okay.
Chris Chi
This is Chris Chi. When you are talking about like pricing, (Technical Difficulty) same product, same process technology node. We certainly have some ability to increase the price in our market. In the meantime, we also identify the low-margin product line and we negotiate with the customer to reduce the exposure in the low-margin line. So there are several activity, including the product mix shifting towards the 90-nanometer. As a result of – as a result, we are able to increase the ASP.
Steven Pelayo – HSBC
So as you look into the second quarter, you optimize your mix, getting rid of some of the lower end and you increase your more leading-edge? Are we thinking another 1% to 2% ASP increase in Q2 seems reasonable?
Chris Chi
Yes. That's correct. We think in the Q2, the trend is continue – will continue.
Steven Pelayo – HSBC
Okay. And then just a couple of quick housekeeping ones. I know in the past SMIC has received R&D credits or government subsidies related to both R&D and CapEx. Have you received any of those? Do you plan on receiving any of those in this year and how much would they be and when do you think is the timing?
David Wang
In Q1, about $2 million. In Q2 –
Steven Pelayo – HSBC
For R&D or for CapEx?
David Wang
On the R&D.
Steven Pelayo – HSBC
Okay, okay.
David Wang
In Q2, about another couple of million dollars.
Steven Pelayo – HSBC
Okay.
Gary Tseng
This is Gary. I'd just like to comment on that. So we definitely expect – we definitely hope we would be able to get the R&D subsidy from the government, but the difficult part is the (inaudible) get through the process, which is very difficult to make a forecast or predict.
By the way, I'd just like to get back to the question you just asked and we didn't answer that is while the depreciation in total money is dropping, but the depreciation number in the cost for goods sold has increased. As you can realize, the depreciation is really followed – in the cost of goods sold, it is tied with the number of wafers shipped. So as the number of wafers shipped increase, these – specifically, depreciation item in the cost of goods sold will be – increase accordingly. So I believe this is the reason.
David Wang
All right. Simon likes to make some comment on this issue.
Simon Yang
Yes, this is Simon Yang. Of course, we want to maximize the use of all available resources. But we also understand certain resource, we can just hope that (inaudible) come from. So our plan at this time is that we do not plan to increase our R&D spending drastically, but better optimize and the focus.
And like David and Gary already mentioned, we are looking to return on the investment. Meanwhile – I mean, the process of cutting lot of many essentially projects and the focusing all available limited resources on the essential major projects, which related to our core business. With that, I believe we still target to achieve our objectives.
Steven Pelayo – HSBC
Great. And then a final question, just a little bigger picture. In terms of financial structure, I'm curious, Gary, your book value per share has obviously come down quite – cut in half or so in the last year or so. Is there anything else you think you can do to optimize the balance sheet or is this kind of the capital structure that you think is ideal for the company?
Gary Tseng
Well, we are definitely aware of the weakness or the shaky situation of our capital structure and we are evaluating all possible venue in order to enhance our capital structure into the next one or two years' time frame.
Steven Pelayo – HSBC
Okay. That's it for me, guys. Thank you.
David Wang
Thank you.
Operator
I would now like to hand the call back over to CEO, Dr. David N.K. Wang for closing remarks.
David Wang
Well, thank you for joining us on today's earnings call. And we really appreciate your continued support and trust, and we will try to be transparent to you all the time. And today, we have all the executive team members here in the room, because they are really eager to say hello to you guys. And we are really in sink in our philosophy in management and have a unified belief and a target to become profitable company.
Thank you for joining us and have a nice day. Bye-bye.
Operator
Thank you for your participation in today's presentation. This concludes the conference, you may now disconnect. And have a great day.
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