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Semiconductor Manufacturing International Corporation (NYSE:SMI)

Q4 2010 Earnings Conference Call

February 17, 2011 7:30 PM EST

Executives

En-Ling Feng – Director of IR

David Wang – CEO and President

Gary Tseng – CFO

Analysts

Randy Abrams – Credit Suisse

Daniel Heyler – Bank of America Merrill Lynch

Steven Pelayo – HSBC

Eric Chen – Daiwa Capital Markets

Rick Hsu – JP Morgan

Operator

Welcome to the Semiconductor Manufacturing International Corporation’s fourth 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 of Investor Relations.

Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's website. Please be advised that your dial-ins are in listen mode only. However, at the conclusion of management presentation, you 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. Webcast playback will also be available approximately one hour after the event 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 statements.

En-Ling Feng

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

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

Please also be reminded of the Safe Harbor statement, which is provided as follows. SMIC's statements of its current expectation are forward-looking statements, subject to significant risk 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, 2010.

For today's agenda, our President and CEO, Dr. David N.K. Wang, will speak on SMIC's key initiatives and comment on our business. Following that, CFO, Gary Tseng, will walk us through our unaudited financial results of 2010, then our fourth quarter 2010 financial results, and followed by first quarter 2011 guidance. Then we will open the call for Q&A.

I will now turn the call over to our CEO, Dr. David Wang.

David Wang

Thank you, En-Ling. Good morning and good evening to everyone. Thank you for joining us. 2010 was a year of achievement for SMIC. First, I’m very pleased to report that SMIC continued to be profitable for the third consecutive quarter and has achieved its first profitable year at both operational and net income levels after five years of loss. I would like to thank SMIC employees for their efforts which resulted in enhanced customer relations, successful advance the technology ramp up and the overall effective execution.

Second, we recorded historical high annual revenue of $1.556 billion for 2010, representing a year-over-year growth of 45.2%. Fourth quarter gross margin of 24% exceeded our guidance. We achieved a 20% gross margin for the entire year of 2010, which is the highest gross margin performance achieved since after the year of IPO.

Furthermore, we received various awards in 2010, recognizing our high level of performance and service as well as improvements. Five of these 10 firms are our top 10 customers. We are gaining momentum in engaging with key customers on both, legacy and advanced technology. All this shows we have made a significant progress compared to 12 months ago. We have confidence that our momentum will continue through 2011 and onwards.

As for our advanced technology developments, 65-nanometer revenue, more than three-fold in Q4 compared to the year prior, and we are confident that this technology node will continue to be a key revenue driver in 2011. We had 26 new tape-outs for 65-nanometer and 55-nanometer in 2010, and more than 50 new tape-outs are planned for the first quarter of 2011.

We experienced the increase to 65-nanometer and 55-nanometer demand for communications applications, including Wi-Fi, Bluetooth and handset. Our 45-nanometer and 40-nanometer development is on schedule and we’re aiming that production in the second half of 2011. We currently have six customers committed to use our 45-nanometer and 40-nanometer process, and this number continues to grow. We are also working with leading companies on products across platform applications with our enhanced latest technologies.

As one example, earlier this week, we announced our collaboration with Fingerprint Cards company to provide our 0.35 micron and 0.18 micron technology for their fingerprints [inaudible]. Our unified technology development since the beginning of 2010, we have been focusing on building up our IP portfolios. In 2010, our IP investments enabled numerous customers, 65-nanometer and 55-nanometer tape-outs. In 2011, we plan to further increase our IP investments for advanced technology nodes, which will further facilitate collaboration with strategic customers.

For our 2011 business strategy, we will continue to closely collaborate with international Tier 1 customers mostly in North America. Our leading technology and the continued service in the circle [ph] of the growing local Chinese fabless.

North America annual revenue contribution was more than half of total sales in 2010 and increased 34.8% compared to 2009, with increased production demand for advanced nodes, especially communications products.

For the full-year 2010, our China revenue more than doubled compared to 2009 to 29.3% of total sales of 2010. Chinese fabless industry continues to grow and our China customers are advancing their technology requirement for consumer and the communications applications. Three Chinese customers are currently in 65-nanometer mass production with us. According to iSuppli research, Chinese fabless is estimated to grow 12.3% in 2011 and over 17% in 2012, surpassing the growth rate of global semiconductor. Also according to iSuppli research data, SMIC was ranked number one in terms of China foundry market this year in 2010.

We believe SMIC is currently at the positions in capturing the China market opportunity with its strategic location and by possessing the most advanced semiconductor manufacturing capability and for the expert licensing in China. Based on customer feedback, our operations have improved. Rating leading industry standouts, all of our fabs have been improved their lining yields to above 99%. And in 2010, all of our defect density improved more than 30% in the last half of the year.

As mentioned briefly earlier, we were given numerous awards by customers, such as Top [inaudible] Foundry Supplier, Number 1 Supplier Performance, Best Yield Improvement, 2010 Top Supplier, 2010 Top Delivery Performance and others. So overall enhanced performances is driving stronger customer partnerships for SMIC. We will continue to optimize our operations to be competitive in the long term.

Looking forward in 2011, business performance in the first quarter 2011 is currently expected to be down, because of seasonality and the product transition to 65-nanometer for some of our customers. But with increased 65-nanometer tape-outs in the first quarter and overall will strengthen the product mix, we believe we will see strong momentum in the second quarter with robust growth into the second half of 2011.

To address capacity and expansion, in 2011, we plan to spend approximately $1 billion in capital expenditures mainly to match the high demand for advanced node capacity. Our Beijing 12-inch fab capacity which is currently equipped for 23.3k per month is targeted to expand to 40k per month capacity by the end of 2011, of which, 27.5k will be 65-nanometer capacity. Our current 65-nanomter capacity is full, running at more than 95% of utilization for the year. Even with the planned 12-inch expansion, we cannot meet all our customers’ demand. Moving forward in 2011, we believe the advanced node demand will more than exceed our growth.

In summary, we achieved a profitable 2010 successful 65-nanometer ramp-up. We improved the operations and overall our customer relationships. We continue to forecast our sustainable profitability for the long term. In the near term, we continue to ramp-up 65-nanometer and 55-nanometer and bring our 45-nanometer and the 40-nanometer in production by the end of 2011. With our planned build-up, we target to outgrow the foundry industry in 2011, and we look forward with our strategy and execution to deliver sustainable value to our shareholders.

I will now hand the call over to our CFO, Gary Tseng, to update us on the financial results.

Gary Tseng

Thank you, David. Good morning and good evening to everyone. I will now take a few moments to outline our unaudited full-year 2010 and the fourth quarter financial results, and then follow with our first quarter 2011 guidance. You may also refer to our quarterly financial presentation on our website. Please note that all currency figures are in US dollars unless otherwise stated.

In 2010, SMICs enter a new chapter of its history to deliver a set of solid operational and financial results for our shareholders. Our 2010 revenue grew at historical high of 45.2% year-over-year to $1.556 billion. Gross margin increased to almost 20% by operating margin at 1.4%.

On top of this, we achieved a full-year breakeven with net income of $13.1 million in 2010, and a net margin of 1%. If we exclude the nonrecurring item of $29.8 million loss from marked-to-market from the commitment to issue shares and warrants from our litigation settlement and [inaudible] $28.5 million gain from Chengdu Government Cension was acquired by a third-party, our net profit in 2010 would be $14.4 million.

Looking at the fourth quarter of 2010, total revenue increased 0.08% quarter-over-quarter to $411.8 million, which was in line with our previous guidance with revenue from Xinxin and Tianjin totaled $70.8 million in the fourth quarter which was 4.3% of our total revenue. This improving wafer revenue from the managed fab for fourth quarter, the company revenue growth was 0.9% quarter-over-quarter.

Fourth quarter gross margin was 23.9% compared to third quarter’s 24.5%. Without booking revenue from the managed fab, normalized gross margin in the third quarter and the fourth quarter was 25.1% and 25.5% respectively which is about average quarter-over-quarter.

Looking at our operating expenses, we originally guide for an OpEx range of $80 million to $84 million. However, in the fourth quarter, the recorded OpEx was $57.3 million as it was offset by the receipt of a cash payment from the Chengdu Government after a third party provisioned [ph] of the managed effect Cension in October 2010.

Upon the completion of the acquisition, we collect a cash receipt of $28.5 million as a part of the outstanding balance of $47.2 million offsetting our G&A expenses. I hope the remaining balance of $18.7 million can be collected in the near future. With this cash receipt $28.5 million, our total operating expenses should be $79.1 million in the fourth quarter before the foreign exchange loss adjustment of $6.8 million compared to $18 million last quarter.

Regarding the foreign exchange, despite the recorded loss of $6.8 million in the operating activity, there was a gain of $9.9 million in the operating activity. Net-net, the overall gain from foreign exchange was $3.2 million in the fourth quarter and $5 million in the entire 2010. Going forward, in order to rephrase a more true and fair operating expenses bigger, all of foreign exchange adjustment was recorded under non-operating items so as to reduce the ambiguity.

All-in-all fourth quarter has been a very encouraging quarter as we achieved a record high revenue of $411.10 million and a net income attributable to the holder of ordinary share of $68.6 million compared to the net income of $30.4 million in the third quarter, and which translates to fully diluted earning of $0.13 per ADS in the fourth quarter of 2010.

I’ll move to the balance sheet. In the fourth quarter, subscription of roughly $1.5 billion in [inaudible] of $102 million from our major shareholder was fully completed as we further pay down some short-term debts in the fourth quarter. Our debt-to-equity ratio has been significantly lower to 40.8% compared to 46.4% in the third quarter.

In terms of the cash flow, we generated a $248.6 million operating cash compared to $124.2 million in the third quarter, despite our normal level of cash from operation should be around $160 million n the quarter. The operating cash increase in the fourth quarter was due to the receipt cash payment from Chengdu Government after acquisition of Cension by a third party for $28.5 million; and a reclassification of restricted cash into our operating cash for $21.9 million which we earlier received a government subsidy for specific R&D purpose; and another government subsidy, our utility upon a previous year for Beijing fab for $14 million; and also a $20 million of advance payment from one of our customers.

Regarding our revenue breakdown by application, communication is stronger than seasonal growth of 10.4% contributing 50.5% to our total revenue. This growth was mainly driven by wireless and mobile home products. Meanwhile, consumer and computer demand was weaker than seasonal, of course of which consumer contributed 39.7% of total revenue and a recorded a decrease of 6.3% quarter-over-quarter.

Regionally, in the fourth quarter, revenue for North America amounted to 56.4% of our total revenue with a solid growth of 8.6%, while China slightly decreased 2.8% quarter-over-quarter contributing 31.2% to our total revenue. But if we look at China revenue without considering the management fee from the managed fab, our China revenue actually still grew 3.0% from $125.8 million to $113.1 million quarter-over-quarter. [inaudible] recorded a 20% revenue decrease in the fourth quarter mainly due to Asian customer excluding China related to seasonal softenings more than US customers.

In terms of technology, wafer revenue from advanced technology of 90-nanometer and below grew 5.5% compared to last quarter, mainly attributed by the momentum of 65-nanometer ramp-up which grew 24% quarter-over-quarter and has contributed 8.6% to our wafer revenue in the fourth quarter 2010. In the fourth quarter, our utilization maintained at a high level of 96.8%. Our Beijing fab capacity went up to 22.5000 wafer demand to 23.3000. We expect to further ramp up 12-inch to an around 27,000 by next quarter which include 10,000 65-nanometer capacity.

Looking ahead at the first quarter of 2011, we are guiding revenue to decrease 6% to 9% compared to fourth quarter. Revenue from Xinxin will be around 5% to 7% of our total revenue. Gross margin is expected to range from 18% to 20%. We expect our operating expenses to range in from $82 million to $86 million. In terms of CapEx we spent $728 million in 2010. And we are framing our 2011 whole year CapEx to be approximately $1 billion. It will be frontend loaded to expand our 65-nanometer capacity.

I will now hand the call back to En-Ling for the question-and-answer session for this call.

En-Ling 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). The first question is from the line of Tony Wu with Credit Suisse. Please proceed.

Randy Abrams – Credit Suisse

Yes, hi, this is Randy Abrams from Credit Suisse. First question just on the outlook; two parts to it. For first quarter is it down 8% to 10% or – I think did you talk about why the transitions to 65-nanometer are impacting sales? And then as you move through 2011, what are the applications or maybe if geographies will you feel confident and believe to outgrow the industry?

David Wang

The two question. The first one, Q1 2011, the revenue drop because two leading customers are changing from 0.13 micro to 65-nanometer, another customer from 90-nanometer to 65-nanometer. And as you know, it takes few months to really tape out and quantify and earning. So, therefore, we are not able in Q1 to ramp to the normal volume, but however is long ramping now both of our customers. So this cause a drop of the revenue. Certainly this is one reason.

But also another reason is seasonality fact, and across Chinese New Year. And also, last year we were so busy, the utilization is almost a 100%, we didn’t have time to do any maintenance. And we are doing in every fab shutdown for two days to do the annual maintenance. So all those plus the utilization of the overall factory. But this will catch up in Q2.

The second question you asked about the applications. And the 65-nanometer according to IBS Survey, it’s about 20% of $33 billion of foundry market, so which means the 65-nanometer will be $6.6 billion for 2011. And we have more than 10 customers, about half in China and the half in US, and request for their capacity for 65-nanometer for this year. And actually we even cannot really meet their requirement.

Now the application, most is communications, even including the media tabloids product for the application processers, for 65-nanometer one company in China, one company in US, and also the consumer products including the set-top box, TD-SCDMA, Wi-Fi, Bluetooth, you name it, all of those kind of our communication products. And we will think our 65-nanometer – actually 65-nanometer/55-nanometer and that will be the capacity expansion for in Beijing. And the overall revenue we believe could be over $0.5 billion for us. Thank you.

Randy Abrams – Credit Suisse

Okay, thanks. And if I can ask a follow-up question on the CapEx moving up to $1 billion, if you can talk about the funding, I think you normalized operating cash flow is $160 million per quarter, so maybe comes up a bit. But could you talk about plans to raise capital? And you’ve mentioned constraints, but if you were able to raise capital was there an upside to CapEx that you would spend more if you had the capital?

Gary Tseng

Well, first of all, you can look at our last year’s CapEx. The EBITDA is around $650 million. We expect this year we will be maintaining very much the same level. And definitely we will still have the leverage from bank, so at least $1 billion CapEx estimation should be around – while we can reach for without additional equity funding. SMIC, still needs to strengthen its financial structure, and so we are still searching for all the alternative to raise the equity funding in order to improve our equity structure. But for now, as far as we can reach our $1 billion CapEx, we feel comfortable with. And definitely if there is a chance for us to raise further equity and probably more important to mention our customers’ needs, we should proceed for the higher CapEx amount.

Randy Abrams – Credit Suisse

Thank you.

Operator

Your next question is from Daniel Heyler with Bank of America Merrill Lynch. Please proceed.

Daniel Heyler – Bank of America Merrill Lynch

Thank you, good morning, gentlemen. I had two questions. I guess the first one for David. With the improving execution on 65-nanometer and the rapid increase in the pipeline, I’m wondering if you could elaborate on the linearity of your capacity increase. It’s taking somewhat of a depth in the first quarter. Margins are taking a dip due to the conversions of the two customers. But as you bring on these new customers, will you be exiting the quarter with a higher level of capacity? You’ve talked about adding 10k in the second quarter; I’d like to know whether that will be – that 10k will be towards the early part of the quarter or the latter part of the quarter?

David Wang

Okay. Our capital as you know is because of the delivery of the [inaudible] capital is front loading. But I will tell you what’s ramping now. Q4 last year for 65-nanomter in Beijing is 5.5k per month capacity. In this Q1 will be 10 – will be 10k. And the Q2 will be 17.5k. And Q3 will be 25k. And Q4 will be 27.5k. That’s our plan. And we have all the custom lining up. Yes.

Daniel Heyler – Bank of America Merrill Lynch

That’s great. Thank you, I’m sorry. I was just wondering what – if you could provide the month – would you mind providing where you will be in April in terms of productive capacity?

David Wang

At the beginning of the Q2 and the end of Q1, so that will be between 10k and 17.5k. I will say it’s about 14k to 15k in April.

Daniel Heyler – Bank of America Merrill Lynch

Got it. So it’s a linear wrap. Great. And the second –

Gary Tseng

Kind of linear.

Daniel Heyler – Bank of America Merrill Lynch

Excellent, thank you. And then for Gary, I think from the standpoint of looking at the OpEx, operating expense, you had previously guided $80 million to $84 million in the fourth quarter. And excluding – it looks like excluding the various write-downs, I believe that came in at about $79 million, you can verify that, that’s the first question. But then what I’m wondering is, what’s causing this incremental increase to the guidance? Now for the first quarter is $82 million to $86 million, so that’s about a $2 million incremental increase relative to fourth quarter. Would you elaborate where that’s coming from? Is that tape-outs, is that R&D, is that increased people or what is it?

Gary Tseng

Well, thanks Dan. We normalized our fourth quarter. Yes, the OpEx will be around $79 million. When we look at the first quarter this year and probably the rest of this year as well, we expect our OpEx will be moving up gradually and the main reason is two-fold. The first one is we will increase our R&D expenses. We’re still trying to move faster in our 40-nanometer and 45-nanometers development which our customers urgently need. So I would expect this will be occupy the main OpEx increase in the 2011 on one hand. On the other hand, we did increase the compensation to our employee, so this will increase our expenses levels.

However, we are keen on these operating expenses control, so this year we would have company-wide organization audit. We hope we will be able to bring up our productivity from all of our staff both in the fab and also in the office. Thank you.

Daniel Heyler – Bank of America Merrill Lynch

Thank you. So we can assume kind of an ongoing trend of a couple million increase per quarter for now.

David Wang

Yes.

Daniel Heyler – Bank of America Merrill Lynch

Thank you. I’ll get back in the queue, thank you.

Operator

Your next question is from Steven Pelayo with HSBC. Please proceed.

Steven Pelayo – HSBC

Yes, could you just be a little more specific to me? Your gross margin guidance down about 500 basis points quarter-on-quarter, how much of that is coming from product transition issues, or is depreciation increasing quarter-on-quarter? Just help me try to understand that sequential decline. And then I assume we’re going to be through that by the second quarter, do you think the second quarter mainly snaps back to equal to or above where we were in the fourth quarter?

Gary Tseng

I will say product transition probably occupies somewhere around 3%, 4% of the whole things. And also because of the seasonality and also the annual maintenance will be each occupied at 1% or so. So a total of 500 basis points roughly I would look as very much first quarter specific.

Depreciation, when I look at that, on one hand, we have fully depreciated machine to volume and also we increased our CapEx which will increase our depreciation, so this is very much balanced out. I look at the first quarter depreciation should be bottom out, the [inaudible] level for the whole – comparing with the previous and compare into the future will be the loss of point for the whole – for the company. But – and really we’ll be starting to going up as we increase our CapEx.

Second quarter’s gross margin I would expect to bring back to the normal level which you accounted for 24, 25% level. Thank you.

Steven Pelayo – HSBC

Okay. And then I’m just curious. As the – well first of all your depreciation cost, I think you guys have said for this year, you’re still flat-to-down for the full year, the depreciation portion in the cost of goods sold. I guess I just want to double-check that. And how that depreciation starts in – starts increasing as we add this capacity, what does that do to kind of your breakeven run rate or do you just feel that it’s all advanced capacity, that’s higher margin and in fact your breakeven still comes down, your quarterly breakeven run rate?

Gary Tseng

Well, the depreciation in the 2011, I would expect it should be increased gradually quarter-by-quarter in this year. But all-in-all the total 2011 depreciation will be very close to 2010. Our breakeven point and this points will come out, calculation will be somewhere around 80%. Hopefully when we’re starting to increase our scale, we would expect we will bring down the utilization – breakeven utilization rate going down.

Steven Pelayo – HSBC

I guess that doesn’t seem to match though. 80% breakeven utilization rate based on your guidance for Q1, I guess there is a product transition. On an ongoing basis you’re saying 80% utilization, okay. Excellent. And then do you have a target just for this year for cash flow? I guess you drew out 160 ongoing, is that just kind of the number we should be thinking about 160 type per quarter, what is that 650 for the year with $1 billion in CapEx, kind of in the negative 350 free cash flow, is that what we should be thinking?

Gary Tseng

Okay. You will specific what your question. I’m sorry.

Steven Pelayo – HSBC

I’m trying to understand your 2011 cash flow. You had mentioned about $165 million cash flow from operations was kind of a quarterly ongoing run rate for you. So I’m just saying that’s roughly $650 million for the year, yet you want to spend $1 billion in CapEx, so should I be thinking that the free cash flow for 2011 is going to be somewhere around that negative $300 million, $400 million or so.

Gary Tseng

Yes, correct. So in other words, we should increase our spend leverage.

Steven Pelayo – HSBC

Okay, excellent. Thank you guys.

Gary Tseng

Thank you.

David Wang

Thank you.

Operator

Your next question is from Eric Chen with Daiwa Capital Markets. Please proceed.

Eric Chen – Daiwa Capital Markets

Hi David Wang.

David Wang

Yes.

Eric Chen – Daiwa Capital Markets

Okay. My first question regarding to the fund raising. And I just would like to maybe clarify. You mentioned you will not have a fund raising, so also you mentioned you are going to have a syndication, is the bank clear?

Gary Tseng

Well let me – this is Gary, let me clarify a little bit. Definitely we are still searching, we are looking on our bank loan syndication. Our Beijing Bank has reached a conclusion and we are looking on the Shanghai as well. So the bank leverage will be one of the major activity in the funding plan we have. Move to the equity side, we are looking on – as I said earlier, we are looking on all the possible alternative for the equity funding, because I believe we need to strengthen our equity structure. So we are still looking on it.

Eric Chen – Daiwa Capital Markets

Well, you have raised your – on the equity side?

Gary Tseng

There is no decision on any possible funding alternative.

Eric Chen – Daiwa Capital Markets

Okay. I see. And by the way, the – you mentioned three China IC client use the 65-nanometer process. And what kind of revenue contribution that will be and how many the China client will use your 65-nanometer process, let’s say by end of this year based on your expectation?

David Wang

Well, we have three China customer use 65-nanometer. Actually we have a good problem there. However the real delivery still will be executing in the next few quarter. If we look at it, it’s quite promising as they their technology [inaudible] is beyond what we originally expect. So we cannot give exactly the number yet. But definitely we are quite promising on those customers, 65-nanometer will ramp-up.

Gary Tseng

Yes we do have at the least five NTO for Chinese customers. Yes, including 65-nanometer and 55-nanometer. So we don’t have enough the capacity for everybody. So – but I think they also have a pretty strong demand.

Eric Chen – Daiwa Capital Markets

Okay, I see. And then so how many – the revenue contribution from the China client last year and would – I’m sorry, I don’t – would you mind giving that number again and how many –

Gary Tseng

You mean China customer.

Eric Chen – Daiwa Capital Markets

Yes, China customers.

Gary Tseng

Okay. Now if I take Q4 2010, 31.2% of our revenue coming from China domestic fabless.

Eric Chen – Daiwa Capital Markets

Okay. And then how many –

Gary Tseng

In the Q1 –

Eric Chen – Daiwa Capital Markets

Right

Gary Tseng

31.2% in last quarter.

Eric Chen – Daiwa Capital Markets

Okay. 31.2% in Q1.

Gary Tseng

Right 31.2%. In this quarter, we estimate about 34%, so which is a little bit higher than last quarter. And actually the total revenue in 2010 has doubled compared to 2009 for Chinese customers.

Eric Chen – Daiwa Capital Markets

Okay, so can I say this way? If I assume that the revenue contribution from China client like the negative 26%, 27% for the whole year last year, I probably can assume the revenue contribution on the China client this year in terms of a revenue percentage probably like the 40% – in between the 40% and 45%.

Gary Tseng

No, because we are growing, we have to take everybody’s business. Our North America business last quarter is 56.4%. And our estimated for this quarter is still over 54%. Relatively for advanced technology node, the volume growing outside China is faster than China. So you have to think this way. So we want to keep above 25% to 28%, I think that will be very healthy for us to be the leading market share leader. In the meantime, we still can grow.

Eric Chen – Daiwa Capital Markets

Okay. And sorry, would you mind talking about –

Gary Tseng

25%, 28%.

Eric Chen – Daiwa Capital Markets

25%, 28%. I see. And the revenue from China client double growth – and the revenue from the China client were double growth this year, right? Were double this year?

Gary Tseng

No, I think our revenue this year – overall revenue we targeted 12% to 15% -- 15% to 20% increase. So you cannot double the China market.

Eric Chen – Daiwa Capital Markets

I see. How about revenue from the China –

Gary Tseng

They did well growth for sure.

Eric Chen – Daiwa Capital Markets

Okay. Do you have any target – how many percent growth you think will be for this year for the China client?

Gary Tseng

Yes, 25%.

Eric Chen – Daiwa Capital Markets

I see. You are very clear.

Gary Tseng

Okay, thank you.

Eric Chen – Daiwa Capital Markets

Thank you, thank you very much.

Gary Tseng

Yes.

Operator

Your next question is from the line of Rick Hsu with JP Morgan. Please proceed.

Rick Hsu – JP Morgan

Yes, hi, good morning, David, En-Ling, and Gary. Well, I just have two questions. I think one is the kind of follow-up to Eric question on the 65-nanometer ramp-up, because you reported roughly around a – I think 9% revenue contribution from 65-nanometer in Q4. Just could you give me some more quantitative idea what kind of this revenue percentage contribution is for the whole year this year?

Gary Tseng

You mean the whole year last year or this coming today.

Rick Hsu – JP Morgan

No, I mean –

Gary Tseng

2011.

Rick Hsu – JP Morgan

I mean by quarter basis, because Q4, the number roughly is about 9% contribution, and how do you see the ramp-up throughout the whole year, but on reporting basis.

Gary Tseng

Q4 – well at the beginning 2009, Q4 2009 it’s almost zero, okay? And that was about to get a 2% in Q1 last year and end up with 9% in Q4. So if you take the average is about 4%, 3.5%.

Rick Hsu – JP Morgan

Then what about this year? How is your target for this year?

Gary Tseng

This year, we – our target is high 20%, which means at least 25%, hopefully even getting into the 30% range, 30% range.

Rick Hsu – JP Morgan

That’s for the whole year or for Q4 – by the end –

Gary Tseng

For the whole year – for the whole year.

Rick Hsu – JP Morgan

For the whole year, okay that’s whole year.

Gary Tseng

High of 20.

Rick Hsu – JP Morgan

Okay, so you would be by the end of 2011. Okay so you will be by the end of 2011, you’re ramping up to high 20s, right?

Gary Tseng

Yes.

Rick Hsu – JP Morgan

It’s not a full year – it’s not a full-year average, right? Okay.

Gary Tseng

We have to gradually ramp.

Rick Hsu – JP Morgan

All right, understood. The second question is how do you feel about this Chinese New Year holidays sell through?

Gary Tseng

Chinese New Year. The Chinese New Year?

David Wang

Okay, I was a visiting customer in US. But however I think it’s great people lined up buying iPhones, iPad. I think people have the money to spend, so the sales is good. Now you mean for us or for in general?

Gary Tseng

In general for 40-nanometers especially given this is holiday season in China, how do you –

David Wang

I think it’s great. I am reading some information. For example, the smartphone, by 2013, the Chinese market will be over 22%. Will become the number one market for smartphones in 2013. And this year will be the second year of the number one in automobile market. And it will very soon become number one for luxury goods too. I think the economy here is pretty good. That’s encouraging for us.

Rick Hsu – JP Morgan

Okay, thank you so much.

David Wang

Okay, thank you.

Operator

(Operator Instructions). Your next question is from Daniel Heyler with Bank of America Merrill Lynch. Please proceed.

Daniel Heyler – Bank of America Merrill Lynch

Thank you. Yes, David, I had a quick follow-up on the utilization trends in 200 millimeter in the first quarter where that is troughing and what are some of the customer dynamics there and will that snapback in the second quarter? Thank you.

David Wang

Okay, the Q1 – the 200 millimeter we have in Shanghai and Tianjin fab. And the Tianjin fab is higher than the Shanghai. Shanghai is a mega fab. And the average of both fab is above 85%.

Daniel Heyler – Bank of America Merrill Lynch

Okay. And what was it in the fourth quarter?

David Wang

Fourth quarter is almost 90%, 99%

Gary Tseng

98%.

Daniel Heyler – Bank of America Merrill Lynch

Okay. Now do you attribute that short-term inventory adjustment or I mean will that business come back in the second quarter you think and what will it average in the second quarter end utilization? Do we get back to mid-90s again or will it take longer?

David Wang

You see, once you have a major custom product transition from 0.13 to 65-nanometer you miss two ends. So what we do is we are concentrating on establishing a de novo partnership and the customers for the 200 millimeter for specialty products area by the CIS, like MIMs and also microcontroller, and we’re doing pretty well. We are going to introduce maybe more than five well established customers, fabless as well is ideal. So I think the momentum is coming. Last year we were too busy to really working on the product mix. And now we have all these effort in the last six months. So utilization will pickup.

Daniel Heyler – Bank of America Merrill Lynch

Okay. So they kind of gradual pickup then, I guess, into the second quarter, is what you’re saying?

David Wang

Yes.

Daniel Heyler – Bank of America Merrill Lynch

I’m wondering to what extent the depth is inventory driven, because we noticed some of other foundries there was 8-inch short?

David Wang

The inventory really – I also talked to some of our customers, it really depends. If they are doing the microcontroller also depends on the company’s practice. Somebody have say four weeks, somebody 10 weeks. But however overall for the 8-inch customer as well as 12 inch customer I talked to more than six customers, they say they’re cautious. But however the inventory level is still below the alarming time. So it’s normal, it’s not too high. We don’t really worry about. Some people say, “The visibility; well wait until the second half of March, we will see better visibility.” But we don’t worry much.

Daniel Heyler – Bank of America Merrill Lynch

Okay, so there weren’t many cuts in the first quarter based on inventory adjustments from what you can see?

David Wang

Right.

Daniel Heyler – Bank of America Merrill Lynch

Okay. And then finally on – great, thank you. And then finally as we look at the trends in 40-nanometer and 45-nanometer, it sounded like you are ahead of schedule relative to what you said previously.

David Wang

Last time just – in my second earning release call, and I gave a schedule, and there is no change, okay? For 40LL we freeze to process with two customers back to October last year. And we are going to quantify two customer chips by May this year, okay? And for 45G we will freeze the process in June. And we will quantify in Q3 this year, so which means we will gradually ramp 40-nanometer and 45-nanometer pilot volume production beginning in the middle of Q3. Then we were talking about to ramp the capacity in Shanghai 12-inch fab from today’s 3,000 wafers to around 6.5k per month by the end of 2011.

Daniel Heyler – Bank of America Merrill Lynch

Got it. Thanks for that.

David Wang

Everything comes at – yes, also we are ready here for four customer committed now for the 40-nanometer, 45-nanometer.

Operator

Your next question is from the line of Steven Pelayo with HSBC. Please proceed.

Steven Pelayo – HSBC

Yes, just a quick follow-up there. The 65-nanometer, you talked about reaching high-20s by the end of this year, maybe the fourth quarter. Let’s just say 29% up from the 9% you just did. So that’s 20 points of shift going on. I assume 90-nanometer is going to grow as well. So is it all just going coming at 0.13 micron and 0.18 micron, or how should we thinking about what falls off in the mix, because 90-nanometer is still growth for you and truthfully does 90-nanometer and below, 90-nanometer and 65-nanometer and 4x node [ph] become the majority of revenue by the end of the year?

David Wang

Steve, I think 90-nanometer are causing, if I remember right, which is about 14% of the entire foundry market last year. And the total foundry market last year is above $29 billion, so it’s 14%. And coming to this year, would drop to 12.5% 90-nanometer. However, the 65/55-nanometer will increase from 17.7% to above 20% – to be exact 19.6%, okay? So 65/55-nanometer grow faster than the reduction of 90-nano. So if I take the – yes.

Steven Pelayo – HSBC

No, no, I’ll let – go ahead and finish. I apologize for interrupting.

David Wang

Okay. So in 2011, the total foundry market size is $33 billion and 20% will give you $6.6 billion should be the market for 65-nanometer and 55-nanometer, right? If you take the other three major foundries, they are in and out of Q4, they’re talking about 65-nanometer is about 25% to 30% of their revenue. And if you add this together – in the past we estimate [inaudible] about $0.5 billion 65-nanometer, so it’s above this number.

And then 90-nanometer, we want to answer your 90-nanometer. 90-nanometer we’re now engaged with two to three customers on embedded flash for the controller, okay? And this is very big market in the future for industrial, for home appliances, automotive, it’s a embedded flash. And we have the platform and we are doing very well on this area. That’s the 90-nanometer.

Steven Pelayo – HSBC

Okay, my last question is just – I guess the last question for Gary. If depreciation for 2011 is going to be relatively flattish with 2010, on a quarterly basis when I looked at depreciation in your cost of goods sold, fourth quarter 2010 was a $106 million, first quarter 2010 was over a $140 million, $144 million. So if we’re going to get back to that kind of a quarterly run rate in depreciation and cost of goods sold, it seems like that would impact gross margins pretty significantly. Can you – first of all, am I thinking about that correctly? What do you think the fourth quarter 2011 depreciation and cost of goods sold is and how do you guys offset that to kind of continue mid-20s and above, if you will, gross margins?

Gary Tseng

Well, definitely by the time of 2011 fourth quarter, our production will have a substantial volume in 65-nanometer. And hopefully it will be bringing higher ASP and we are looking for the higher margin as well. We believe the increase in depreciation should be well offset by our advanced node technology [ph] offer to our customer. Actually we are looking forward our gross margin should be able to pin up gradually into the next few quarters. But definitely execution from the fab will be a key.

Steven Pelayo – HSBC

Okay, so despite higher depreciation cost coming on board, you still expect a raise in gross margins throughout the year.

Gary Tseng

Yes.

Steven Pelayo – HSBC

Excellent. Thank you guys.

Gary Tseng

Thank you, Steve.

Operator

Okay. That’s all the time we have now for questions. I would now like to hand the call back to CEO, Dr. Wang, for closing remarks.

David N.K. Wang

Okay, everybody, thank you very much for your attention. I would like to take this opportunity to specially thank all of our shareholders, customers, employees, and suppliers for their trust and support to enable us to be successful in 2010. We are counting on your continued support in advancing SMIC. Thank you for joining us. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. The presentation has ended. You may now disconnect. Have a good day.

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