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Semiconductor Manufacturing International Corporation (NYSE:SMI)

Q2 2010 Earnings Call

August 10, 2010 8:30 pm ET

Executives

En-Ling Feng - Director, IR

David Wang - President and CEO

Gary Tseng - CFO

Analysts

Pranab Sarmah - Daiwa Capital Markets

Steven Pelayo - HSBC

Rick Hsu - Nomura International Ltd

Daniel Heyler - Bank of America-Merrill Lynch

Charlie Chan - Morgan Stanley

Operator

Welcome to the Semiconductor Manufacturing International Corporation second 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; and Mr. En-Ling Feng, Director, Investor Relations.

Today's webcast conference call will be simultaneously streamed through the internet at SMIC's website. (Operator Instructions) The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event at www.smics.com.

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

En-Ling Feng

Good morning and good evening. Welcome to SMIC's second quarter 2010 earnings conference call. For today's call, we have our CEO, David Wang; our CFO, Gary Tseng.

As usual, our call will be approximately 60 minutes in length. The earnings press release and the quarterly financial presentation are available for you to download at www.smics.com under the Financial Information section in the Investor Relations tab.

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 29, 2009.

For today's agenda, CFO, Gary Tseng, will highlight our second quarter 2010 financial results and the third 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 all of you. I will now take a few moments to outline our financial results for the second quarter ended June 30, 2010, and then I will provider our third quarter 2010 guidance. You may also refer to our quarterly financial presentation through our website. Please note that all currency figures are in U.S. dollars unless otherwise stated.

Let me start with the income statement. In the second quarter of 2010, total revenue exceeded our original guidance and increased by 8.4% to $381.1 million due to an increase in shipment and utilization and also due to a change in business model relating to our managed fabs in Xinxin in Wuhan and Cension in Chengdu.

Under a new agreement, customers' purchase orders are signed directly with SMIC, with orders outsourced to our foundry partner, Xinxin and Cension. The model affects how we record our managed fab revenue, while the net margins remained the same as (inaudible) under previous commission-based business model.

The new model enables to deepen relationships with our customers and also more truly reflects our sales capability. We will continue to operate under this business model and (inaudible) as discussions continue between SMIC and the Wuhan and Chengdu local government on how to maximize the benefit of the managed fabs to their region and to SMIC.

Revenue from Xinxin and Chengdu totaled $17.7 million this quarter, which was 4.6% of our total revenue. Excluding revenue from business model change, the company's revenue increased 3.3% quarter-over-quarter.

Q2 marks our third consecutive quarter of gross margin growth, as gross margin improved to 15.6%, up 1 point from the last quarter. The increase was primarily due to an increase in utilization and the reducing depreciation. Using the previous business model with managed-to-fit, the company's gross margin would have been 16.3%.

In addition, extra costs totaling $7.7 million were incurred from annual preventive maintenance in our Shanghai fab, and there are some idle equipment that we started (inaudible) from Beijing fab. Excluding these two items, the gross margin will be 18.3%.

Total operating expenses amounted to $71.5 million in the second quarter compared to $79.5 million in the first quarter of 2010. The decrease was mainly due to a foreign exchange gain of $5.4 million and a $1.5 million subsidy from the government in the second quarter.

Looking forward, R&D expenses are expected to increase as we increase R&D for our advanced nodes. With this in mind, our current and ongoing operating expenses should be in the range of $80 million to $84 million per quarter.

The gain attributable to holder of ordinary shares was $96 million in the second quarter of 2010 compared to a loss of $181.9 million in the first quarter of 2010, sliding by a change in the fair value of commitment to grant shares and warrants. This change amounted to $105.9 million. Excluding this non-operation gain, the company would have put a second quarter loss of $9.9 million.

Fully diluted EPS was $0.20 per ADS in the second quarter 2010 compared to negative $0.41 per ADS in the previous quarter.

I'll move to the balance sheet. Last month, we completed the placing of 1.5 billion new shares issued at HKD0.52 per share to raise $100 million. The increase in equity rate is not reflected yet in the financial result of this quarter as the placing was completed on July 15.

Our major shareholder, Datang Telecom, confirmed its intent in subscribing for new shares to an approximate amount of $100 million. This pending shareholder approval will be at coming EGM.

In the cash flow statement, our cash flow from operations continued to grow for the last five consecutive quarters and we generated $157.5 million in the second quarter compared to $153.3 million in the first quarter.

In terms of market segmentation, based on the slowdown in these figures, revenue from our customer segment was the strongest with 23.5% sequential growth. Meanwhile, our communication and the computer segment reported a decline of 1% and the 13.7% respectively.

Regionally, revenue from both China and the Eurasia grew significantly and recorded a quarter-on-quarter increase of 27.4% and 23.9% respectively, while revenue from the U.S. dropped to 3.8%. In terms of technology, we are pleased to see that 65-nanometer contributed 3.7% to wafer revenue in the second quarter, which is more than double compared to the last quarter. Revenue from 90-nanometer and below accounted for 23.6% of wafer revenue, growing 24.6% sequentially.

In the second quarter, our utilization reached 94.3%. Shipment grew 9%. Excluding Cension and the Wuhan, SMIC's shipment only grew 1.5% with low impact due to capacity. Capacity decreased slightly due to the change in our product mix.

Looking ahead to the third quarter of 2010, we are guiding overall revenue to increase from 4% to 6% quarter-on-quarter. Revenue from Xinxin and Cension will remain 4% to 5% of our total revenue. Our next quarter gross margin is expected to range from 20% to 22%. We expect our operating expenses, excluding foreign exchange difference, to range from $80 million to $84 million.

In terms of CapEx, we spent $164 million in the first half of the year. We are guiding our 2010 whole year CapEx to be between somewhere $700 and $750 million. About 70% of our 2010 CapEx is we're asserting for capacity expansion.

I will now hand the call over to David to comment on (technical difficulty).

David Wang

Thank you, Gary. Good morning and good evening to everyone. Thank you for joining us for our earnings webcast.

We have witnessed overall improvement this quarter and believe we are on course to profitability. We have taken steps to transform this company. And this quarter, we have found a number of things to strengthen the foundations for turnaround.

We have recruited talented senior level managers who are experts in technology development, procurement, IT operations and other areas. And we continue to look for new talent to increase our human capital.

We have developed a council of productivity with motivation programs in sales output, innovation and others in order to retain, motivate and engage talented employees. We are really aligning our compensation structure to make us a more performance-driven organization. We are including communications, channels to better align key employees with company goals and vision.

In June, we held SMIC's first global quarterly management meeting where we communicated the company's message and the goals to all the senior managers. SMIC is dedicated to transform into a new company, with a new culture and the new thinking with improved communication.

On the sales front, our sales teams were reorganized and now are profit-driven and margin forecast. We have also set up a matrix to prioritize our high margin and high potential tape-outs. Regionally, North American customers continue to contribute more than half of our revenue. And we are improving relationships through enhanced operations, technology and service. We are positioning our sales to become their preferred partner.

With the world's highest GDP growth, Mainland China's market is playing a progressively greater part in the overall demand for ICs and an increasing key role in SMIC's future success, driven by China's maturing fabless companies. Our China revenue grew 27.4% quarter-over-quarter.

For 2Q 2010, four of our top ten customers all from the China region. And China now accounts for 28.7% of our total revenue. As Chinese fabless companies grow stronger and stronger as MIT has positioned itself to become their preferred foundry.

This year, we have more than doubled our investment in IT compared to last year. As we lay the foundations for providing better support and service to our customers. The number of new advanced nodes and tape-outs is increasing and is somewhere trending to volume production in the coming quarters.

In the technology area, from a technology standpoint we restructured advanced node development programs to increase executing efficiency and speed. Our 65 nanometer profit and ramping up with shipments more than double in quarter-over-quarter, and likely to double again in the coming quarter.

We currently have more than 10 65-nanometer customers in development and production. With our customers' demand for 65-nanometer products, we are prioritizing these technology nodes. Our 40-nanometer development is also well underway. And this technology will be ready by the end of 2010. Our 32-nanometer technology is in the development stage and we have established a program and a development team.

As to the operations; operationally, we have made many improvements. We have improved efficiency and communication by streamlining the operations and using (inaudible) to monitor performance and efficiency. We recently made a company history with record fab utilization of output without a sacrificing cycle time.

We have also made significant improvements in yield and the defect density. Our revitalized operations continue to generate positive customer feedback. Our 12-inch Beijing fab is running at 20.5 1,000 12-inch wafers per month. We target to increase this capacity to 23,500 wafers per month by end of this year. With customers lined up for our advanced nodes, we will gradually ramp up Beijing fab to meet our customers' needs.

As a conclusion, we continue to see revenue growth in the second half of this year. We are working to put SMIC on solid operational footing as we look to increase scale. So expansion of our current site to match our customers demands. We remain aggressive in turning this company around determined to surpass our competitiveness by meeting our customers need with excellence by balancing increasing scale with sustainable profitability.

I will now hand the call back to En Ling for the Q&A session of this call.

En Ling

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the Pranab Sarmah with Daiwa Capital Markets.

Pranab Sarmah - Daiwa Capital Markets

My first question is basically on your comments saying that you should reach, say, economies upscale and sustain profitability. Could you elaborate what is the size of capacity you are targeting to reach an economic upscale? And how are you going to go for the sustainable profitability, basically how you are going to lower your breakeven utilization rate? What's your target?

David Wang

I want to report you first what is our current capacity. And as Gary mentioned, we will spend $700 million to $750 million for 2010 CapEx. So that will help to increase the Shanghai 18-inch fab from 84,000 wafer per months to 86,000 wafer per month, and a Tianjim 8-inch fab with the restructure of the product mix from 34,300 to 33,800 wafer per month. They mainly will be increased in the Beijing 12-inch fab.

From today's 20.5K to the end of Q4, 23.5K, and also extend to a 27K by the end of Q2, 2011. And we believe with this capacity, we should have sustainable profitability. So that is the current scales. Certainly, several things has to be there. The utilization should be around 90% or better. And also the market dynamics maintaining strong. So we will have the acceptable ASC.

Pranab Sarmah - Daiwa Capital Markets

Thanks for the capacity update. My follow-up questions on the financing, say, to increase your CapEx, say, capacity from 23K to 27K in next two quarters in 2011, how much CapEx you'll need it, and how are you going to finance that?

Gary Tseng

If we expand 65-nanometer capacity for 1,000, it'd cost you somewhere around $60 million to $75 million, depends on the context. So if there is any compound there as we calculate it, 70% of those $700 million to $750 million will be in the 12-inch capacity. How are we going to find all this?

This year, we would expect to have depreciation somewhere around $600 million coming. As in our statement, we just raised $200 million. We still have $500 million cash on hand. We would expect to get some support from our bank as well. So we feel very, very comfortable at this point of time to spent at least level of CapEx to support our capacity expansion.

Operator

Our next question comes from the line of Steven Pelayo with HSBC.

Steven Pelayo - HSBC

It looks like your ultimately are going to be shipped back to free cash flow, negative, I think in 3Q and 4Q, so you may burn a little bit of cash. If you can confirm that? And the second question is what's the for 2011 depreciation, and any initial commentary you might have on the capital spending plans for next year as well?

David Wang

Without considering 2011 CapEx alone, which we will not comment on. Just at $700 million to $750 million of CapEx for 2010 is divided by (inaudible) increase, $125 million on depreciation alone from this new CapEx. But at the same time, we would expect the next year from the previous investment, our depreciation will keep going down very much the same number.

So if we did not spend $700 million or $750 million CapEx for this year, I would expect next year depreciation will be very much stable, the same as this year. But definitely we will watch closely about market, and we may spend more for the next year's CapEx which we don't know yet at this point of time. We probably will have higher depreciation for whole year 2011.

Steven Pelayo - HSBC

Over the last 90 days, there has been some incremental sign of softness and everything from LCDs to game consoles to the PC Food Chain. I'm curious if any of that has filtered up to your level, if you any softness in any particular segment or customer type?

David Wang

So far our Q3 completely booked, and our Q4 is also booked to November. And if we take Q2, our consumer product currently build 42.2% of our revenue and the communication 47.1%. So if you take consumer and the communicating, it's about 90% of our business. And going to Q3 from our book-to-business, the consumer increase actually more than 10% from 42.2% to 44.7%, and also communication increase almost 9% from 47.1% to 48.4%. So if I add to these two categories, it becomes 93% of our business.

We are in computing and others. It's relatively small, near about 7%. Overall, what I feel is we really don't just see any issues for the current Q3 for sure. And also, since we are not (inaudible) capacity, so we don't really feel pressure or impact even for Q4.

Steven Pelayo - HSBC

I just had one more follow-on question. I am curious as you look to your increase in CapEx and your capacity coming online. What type of assumptions are making for the pricing environment at 65-nanometer, even over the next year or so? There seems to be a lot of capacity coming online, are you nervous about that? And how do you factor that into your forecast?

David Wang

Today we get for 169 nanometer customer, and doing very well. And we have in the line more than ten customers doing the take out and the initial qualification of our 65-nanometer. Half of them may lend Chinese customers. And that the rest are the existing customers for the 8-inch and then they upgrade for other product going into the 65.

We feel pretty secure with our customer, the interest and a very solid partnership with these some of the small expansion of our 65-nano. And also because of this, they will help us on the product mix to increase our ASP. Although we spent off some capital, we have some burden on the depreciation. But I think this return will be better than our 8-inch with the same things, the depreciation as a percentage of the revenue.

Steven Pelayo - HSBC

My last question was really just to Gary. In light of the new shares and offering, I'm curious what is the share count going to look like as we go on to the third quarter, fourth quarter?

I am curious what the changes in TSMC shares and warrants in addition to the Datang offering what is your shares outstanding going to look like in the third calendar quarter?

David Wang

I hope I understand your question right. As we have a new 200 million placement, we will increase our share of 3 billion new share. And compare we used to have somewhere 22 billion, we should be reaching somewhere around 25 billion shares. We can supply you more exact number through our IR, En-Ling.

Steven Pelayo - HSBC

I thought it was a little higher than that. I'll follow with En-Ling later.

Operator

Our next question comes from the line of Rick Hsu with Nomura International Ltd.

Rick Hsu - Nomura International Ltd

I've got two questions here, number one, in summer you had 65-nanometer, if I didn't get it wrong you did mentioned about 3.7% revenue contribution in Q2 right?

David Wang

Correct.

Rick Hsu - Nomura International Ltd

Can you elaborate the 65-nanometer business? Exactly what kind of applications from this 65-nanometer?

David Wang

65-nanometer in Q2 contributes to 3.7% of our entire revenue. And if we go to Q1 it's about 2% and in Q3 I think will be 7%. And Q4 could be a very high single digit percentage of our revenue coming from 65-nanometer. In terms of what kind of products for 65, these are (across bond). That's wireless communication, consumer, Bluetooth, every kind of devices, those are the customer who are doing the take out in the qualification.

Rick Hsu - Nomura International Ltd

And second question is about your expansion. And I know you just doubled your CapEx this year. And you didn't touch up on the issue of CapEx. But I'm just curious in you Beijing facility, are you going to build a new your second fab in Beijing next year? Can you just a little bit give us some more color on this expansion?

David Wang

The Beijing has a fab. The fab today is 21.5K per month, and we're going to ramp up to 27K by the end of Q2 next year. However, the cleanroom can take capacity up to 45,000 wafers per month. Then there are certain (inaudible). And also, we needed to launch the market dynamics, because of recently a lot of expansion of 12-inch in the world. So we are playing these very carefully.

So I cannot commit to anybody to say we will ramp to 45K in the short term, or we want to conservatively run and make sure we are making a good return. So maybe after a couple of quarters, we will have very clear information to you.

Operator

Our next question comes from the line of Daniel Heyler with Bank of America-Merrill Lynch.

Daniel Heyler - Bank of America-Merrill Lynch

Just a couple of questions. David, you had mentioned something about 40-nanometer, 45-nanometer being ready by yearend. And so I was wondering if you could please elaborate on what you mean by ready? Is that volume-ready or is your design really is ready.

David Wang

As you know, last two quarters, we mentioned about 45-nanometer. And also last quarter, we talked about the schedule. So far there is no change. So I'll give you a brief report.

We purchased IBM's 45-nanometer, LL and the GP technology. And in the last one year, we shrunk 45 LL and the GP into a 40 LL and the GP, because the 45 is the IBM camp customers and the 40-LL is another strong foundry platform.

So we today have effort and the work on both. And also we get the supply and the support on ICs and the designs from both camp, because nodes are all available.

Now, when it comes to the 40 LL program, we started in May '09 the silicon start. And now we believe and the with very high confidence that September this year, we'll have the process frozen. In February 2011, we will have the process and SRAM qualification. So starting from February '11, we should be ready for pilot production. In the first half, we will be able to do the pilot production and in the second half the volume production.

As to 40 GP, the generic product, actually silicon started at December '09 and the rest had been ready on 2010 July, last month. And the process frozen will be March 2011. So it's six months behind 40 LL.

However, the process and SRAM qualification will start at July 2011. And after that, we can go to the volume production. So which means for 45, 40, both LL and the GP for different technology and the product will all be able for the volume production in the second half of 2011.

Daniel Heyler - Bank of America-Merrill Lynch

And then in terms of the funding requirements to, assuming the process is ready as you plan and to get some reasonable scale in second half of 2011, what do guys think in terms of the costs to say get a (inaudible) of line going?

David Wang

So far we are going to do this in Shanghai 12-inch fab, because the Beijing fab will be dedicated for the 65-nano to 55-nano. So in Shanghai 12-inch fab today, we have 3.1K per month capacity. Some of the wafer start is using for technology developments. And our roadmap and the trend is to ramp these fab into 5,000 to 7,000 wafer per month by 2011 yearend. So we will have at least 5,000 wafers for 40-nanometer and 45-nanometer.

Daniel Heyler - Bank of America-Merrill Lynch

And the cost of that 5k is what I was wondering about.

David Wang

The cost will be a few hundred million dollars.

Gary Tseng

Well, (Dan), the CapEx for 40-nanometer, 45-nanometer, it will probably cost you somewhere around $80 million, if not more, per month. So maybe very much the CapEx you have to spend on that.

David Wang

The 3.1 1,000 wafer per month today already are emerging. So if we ramp to five over 7,000, we only add field equipments. We don't need to add too many equipments. So it takes a few hundred million dollars.

Daniel Heyler - Bank of America-Merrill Lynch

Just a housekeeping question if I may. You had alluded to the China and Eurasia business increasing quite a bit sequentially. As you quote those revenue breakouts, are those apples-to-apples comparison or are you adding in the revenue that came from Chengdu and Wuhan?

David Wang

Apples-to-apples.

Operator

Our next question comes from the line of Charlie Chan with Morgan Stanley.

Charlie Chan - Morgan Stanley

My first question is on gross margin improvement this quarter. Can you give us more details regarding the factors driving that? For utilization, for depreciation, for the one-time expansion you mentioned for second quarter, what are the reasons driving the quarter gross margin?

David Wang

The utilization Q2 is about 94.2%. And Q3, I think we can push to 96%. So utilization itself was above the 2% point. And also, as I just mentioned, the 65-nanometer contributing to our overall revenue were increased from probably 3.7% to 7%. So we will enjoy a little bit to pass the ASP.

And also, depreciation dropped to 5%, 6%, which is about $10 million. If you add these three together, it will really help on the gross margin to bring us, as Gary mentioned, to $20 million to $22 million.

And this is the first time we're giving an exact number on gross margin. And if we take out the Cension and the Xinxin, our gross margin also will exclude the few million dollars, as I mentioned, for 8-inch fab. Last quarter, it was about 18.5%. So we're talking about another 20% improvement of gross margin.

So if you're with me back to my first earnings release call, that was zero gross margin for Q3 and then from zero to 10, from 10 to 14, 14 to 18. And hopefully, next quarter we'll be above 20. So we're making continuous progress.

Charlie Chan - Morgan Stanley

So what should we expect the quarterly depreciation to go up?

David Wang

I think the next quarter, Q1 next year, because we increased the 12-inch. Hopefully, also the revenue will come to play with this increased depreciation.

Charlie Chan - Morgan Stanley

I'm wondering if you can comment on your (inaudible) in fourth quarter. And given you have also 8-inch capacity in the fourth quarter, what do you think about the sequential growth in fourth quarter, or sequential decline?

David Wang

Our utilization for 8-inch for this quarter will be greater than 98%. So there is no way to push to over 100%, because the formula we use is 1:1, not assuming 85% as a 100. And then you get a 104% 105%. So I think for 8-inch wafer will come in to the top, greater than 98.

Now 12-inch, because we gradually ramp, so when you gradually ramp, you certainly some of the machine utilization time off. So we will assume we will be above 90%. Your question is our backlog is in support of these or not. Yes. Our backlog can support greater than 90% utilization and average (inaudible) 95% in Q4.

Charlie Chan - Morgan Stanley

So given also some capacity from Beijing, can we assume that your fourth quarter revenue can be sustained at third quarter level, given your ASP is also increasing?

David Wang

I think we are now working hard on the Q3. But the spirit is every quarter we want to make it better than the previous. That's the spirit, but no guarantee.

Operator

Our next question comes from the line of (Ronnie Ho) with Income Partners Assets.

Unidentified Analyst

I want to be catered about the adjustments, technologies, incentive program, or is there any help from the Chinese government in terms of moving from 8-inch to 12-inch? And second is can you clear up the placement, the placements completed on 100 μ early on, right? So you mentioned 200, the second one is from Datang.

David Wang

The government always supports, and they support very well. But not only financial support, they morally support also. So far, I read a media press yesterday talking about tens of millions of dollars were received. I think the way SMIC is not in that special financial counseling project. We are in the central (government) called '02, '03, '01. And yesterday's media is different. We cannot get a penny from that, not the tens of million dollars.

As a matter of fact, we do have some support from the (11.05) from the '02 project from the government. The last quarter is only about $1.5 million, very little. And maybe Q3, Q4 will be a few more million dollars. Internally, we don't rely on it as our performance, because I drive old management operating in the finance. If we make money, we have to make money on our own, not just money from the government.

The shareholder of Datang, Gary can elaborate some.

Gary Tseng

Can you ask your question again?

Unidentified Analyst

I just to clarify that in the early July, you had raised $100 million. And I just want a clear picture that you said that there will be $200 million from share placement this year.

Gary Tseng

We have received $100 million from the profit holding, and our shareholder, Datang, will invest additional $100 million with us. But since they are our related party and a major shareholder, not using 10% of the share, so their investment has to pass through the extraordinary shareholders meeting. So we would expect this whole process should be finished somewhere in September. By then, we should receive another $100 million.

Unidentified Analyst

Maybe you've approved it?

David Wang

That's equity shares. So it's not a subsidy. So it cannot be used as expense.

Operator

Our next question comes from the line of Steven Pelayo with HSBC.

Steven Pelayo - HSBC

Just two quick clarifying questions. Gary, you were talking about the segment revenues as a percentage of wafer revenue. And then I think, David, you were saying of total revenues. So I guess I just want to clarify that and maybe find out what is your percentage of non-wafer revenue?

David Wang

Total revenue is total wafer revenue. I am sorry.

Steven Pelayo - HSBC

How much is non-wafer revenue?

Gary Tseng

Non-wafer revenue is about $70 million.

Steven Pelayo - HSBC

And then the last question I just wanted to clarify was your gross margin guidance for 20% to 22%. That's including managed fab new business model, right? If you excluded that, I assume maybe it would be 100 or more basis points higher. Do I understand that correctly?

David Wang

It will be a little bit higher. You understood correctly.

Operator

Our next question comes from the line of Pranab Sarmah with Daiwa Capital Markets.

Pranab Sarmah - Daiwa Capital Markets

For the managed fab revenue, how much percentage was from Chengdu fab and whether that revenue would be sustainable going forward?

David Wang

Totally is 8-inch fab, 28. And Wuhan fab is 12-inch only is 3K. And I think in Q2, there are about $80 million combined. And Q3 is alone $20 million from these two fabs we manage. So it's only 3% to 5% of our total revenue.

Pranab Sarmah - Daiwa Capital Markets

But once Chengdu fab is taken over by TI, will that be sustainable, that revenue?

David Wang

They have not signed agreement. So I cannot speak for them. But the way it was discussed, it's the potential buy/arrange agreement if they find we are (inaudible). But however, our customers' wafer will be there around by ourselves for another six to nine months. That's mutually agreed. So we have a six to nine months transition time for our customers.

Pranab Sarmah - Daiwa Capital Markets

And when are you going to depreciate fab-8 in Shanghai?

David Wang

Shanghai is one fab, which is the make up that positive.

Pranab Sarmah - Daiwa Capital Markets

And that 12-inch fab in shanghai.

David

I think it was still half, because I just mentioned we're going to have another 1,500 wafers per month. So that's another equipment. But so far, if I say that if we don't add any equipment, certainly in couple of years it will be zero for depreciation.

Pranab Sarmah - Daiwa Capital Markets

Shanghai 12-inch fab depreciation has already started, that means right?

David Wang

Again, the 12-inch in depreciation, you are asking 8 or 12?

Pranab Sarmah - Daiwa Capital Markets

12-inch, when are you going to depreciate that 12-inch fab in Shanghai, is it still capitalized?

David Wang

It's every month we depreciate, every quarter; and depreciation is roughly millions of dollars.

Gary Tseng

Well, we already started to depreciate the Shanghai 12-inch fab went up to (inaudible). So we didn't totally capitalize and hold it back yet.

David Wang

It's included in R&D expense, because so far as you've seen is for the TD development.

Pranab Sarmah - Daiwa Capital Markets

And my last question is on the second quarter, how did you calculate that utilization rate, because your capacity you have mentioned and if you have said it utilized 94%, it looks like output should be much lower than 560,000 wafer right?

David Wang

Today it's 94% and the Q3 will be 96%. And another thing is utilization is a function of the product mix. Some wafers, say, if you have 10 (inaudible) all of the wafer was 25 or 30 (inaudible). Although your utilization is a high yield output of shipment of wafer is low, but your revenue can be higher.

Operator

Your next question comes from the line of Daniel Heyler with Bank of America-Merrill Lynch.

Daniel Heyler - Bank of America-Merrill Lynch

David, you had mentioned very limited government funding or support in relation to what the press had mentioned recently. I was wondering since you're focused on profitability and achieving some success, would there potentially be some upside or more support from them if say, if the central government was more pleased with the profitability, would they be willing to step up here and provide more capital support to you next year, particularly since semiconductors is fairly important part of their long-term economic development?

David Wang

Sometimes yes, if you are rich, you easy to getting loan from the bank. So we just have to relay do enough efforts to make a profit, then they will more confidence. Even the capital market will have better confidence. And then, to get money become easier as you say, yes.

Daniel Heyler - Bank of America-Merrill Lynch

Apart from profitability, are there any other things that the government is looking for that would provide more time?

David Wang

The government will support, but they don't give you money free. They have to give you exchange for the equity share. It is not like it used to be. So we have to work in a different way. Certainly, they support the technology development. For the 12 five-year plan, they certainly some money for supporting 32-nanometer development. But you know, it's very difficult to predict when the money and timing and amount to come to you back.

So therefore, we usually don't count on loans. We still work to make sure our operation is right. If the money coming, that's great. If we already make profit, the coming just add more profit. But to rely on them to make a profit, probably not a good idea so far.

Operator

This concludes our Q&A session. I would like to hand the call back over to Dr. Wang for closing remarks…

David Wang

Thank you for joining us on today's earnings call. We really appreciate your continued support and trust. And we all look forward to providing updates in the quarters ahead. Thank you very much.

Operator

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Semiconductor Manufacturing International Corporation Q2 2010 Earnings Call Transcript
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