Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Semiconductor Manufacturing International Corporation (NYSE:SMI)

Q4 2011 Earnings Call

February 8, 2012 7:30 PM ET

Executives

En-Ling Feng – Senior Director, IR

Tzu-Yin Chiu – CEO

Gary Tseng – CFO

Analysts

Randy Abrams – Credit Suisse

Daniel Heyler – Bank of America

Steven Pelayo – HSBC

Donald Lu – Goldman Sachs

Rick Hsu – JP Morgan

Szeho Ng – BNP

Operator

Welcome to the Semiconductor Manufacturing International Corporation’s Fourth Quarter 2011 Webcast Conference Call. Today’s conference call is chaired by Dr. T.Y. Chiu, Chief Executive Officer; Mr. Gary Tseng, Chief Financial Officer; and Mr. En-Ling Feng, Senior 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 the management presentation, we’ll be having a question-and-answer session, upon which you will receive further instructions as 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 now like to introduce to you Mr. En-Ling Feng, Senior Director of Investor Relations, for the cautionary statement.

En-Ling Feng

Good morning and good evening – and good evening to everyone. Welcome to SMIC’s fourth quarter 2011 earnings conference call. For today’s call, our CEO, T.Y. Chiu will first provide some general remarks then our CFO, Gary Tseng, will present the financial commentary. This will be followed by our Q&A session.

As usual, our call will be approximately 60 minutes in length. The earning press release and the quarterly financial presentation are available for you to download at www.smics.com under the Events and Presentations section.

Please be also reminded of the Safe Harbor statement, which provides 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 28, 2011.

I will now turn the call over to our CEO, T.Y. Chiu for the opening remark.

Tzu-Yin Chiu

Thank you, En-Ling. Good morning and good evening to everyone. And also belated Happy New Year greeting to all of you. Thank you for joining us for our earnings webcast. I would like to first address the state of our business. As we mentioned in last quarter, the second half of 2011 was weak in terms of foundry business. We believe this was mainly due to the overall industries conservative inventory level caused by economic uncertainties. As a result our total revenue was $1.3 billion in 2011 representing a decrease of 15% year-over-year.

With increased customer confidence and the recovering economy we are seeing some rebound in Q1 and we are also targeting continued growth in Q2.

Now to comment on our direction of strategy, we are continuing our effort towards sustainable profitability and being the preferred foundry provider in China as we continued partnering with international and the domestic partners.

In order to achieve this, our long-term strategy is to maintain our technology advancements as well as to pursue value added differentiation. Our near-term strategy is to work on boosting the overall fab utilization and the efficiency. Based on market sizing, growth and margin trend, as well as our potential capability and resource, we have identified a few niche product lines which we aim to strengthen our unique value propositions.

In some of these segments, we offer unique solutions, technology and the IPs in order to enable our customers to excel in these respective markets. We have strengthened our product marketing group in order to more efficiently and effectively length the market customer requirements with our internal technology development and IP development functions.

The product marketing teams responsibility to quickly and accurately discern market trend and to identify strategies to offer differentiated solution to support our customers. With closer partnership with customers and initiatives to boost fab utilization, our Shanghai 8-inch fab loading is now fairly satisfactory and our Beijing fab utilization is also improving. We are also working diligently with our partners to ensure that loading improvement propagates through our other fabs.

Operationally, we continue to emphasize production improvement and customer service. To maintain stable yield and competitive cycle time for the purpose of customer satisfaction we have also instituted comprehensive systems and controls as well as continuous operational improvement activities on a daily basis. As a result, positive customer feedback is a testament to our strengthened team and improved performance and operation.

In 4Q 2011, a leading customer ranked our Shanghai fab the number one 8-inch fab amongst all of its foundry suppliers. Another leading customer awarded us for excellent track record of support for their power management processor after achieving over 1 billion unit shipment of power management processors with outstanding delivery record over the past year.

Our Beijing fab is a 65 nanometer service continued to improve on both cycle time and defect density. In 4Q 65 nano contributed 21% of our wafer revenue and we hope to continue to grow our 65 nano business to high 20s at the end of the 2012. As our 65 nano utilization in our Beijing fab rise from increasing customers demand. Total new table grew 8.7% in 2011 compared to 2010 with the increase mainly from 65 nano and below with key growth driver from mobile and tablet application.

Now, let me make some comment with regarding the China market. Our China revenue continued to grow along time China’s semiconductor market. In 2011, our China fabless wafer revenue grew 16% compared to 2010 despite of the overall industry weakness. This is equivalent to 30.6% of our wafer revenue in 2011.

The overall demand in China is still relatively strong with our China revenue up 4% sequentially despite of an overall minus 5.6% revenue decrease during the last quarter, quarter-over-quarter. More domestic customers are taking out in our 65 nano, 55 nano with us in various communication and consumer applications. And as well in one of our local flash memory customers revenue to us more than tripled in 2011 becoming a key flash IC supplier for China’s vibrant handset market.

As for technology development, we are very encouraged by our 45-40 progress with very positive feedback from our customers. Our 45-40 nanometer service has become competitive with respect to our peers. We have already begun our early risk production and 45-40 contributed 0.3% of wafer revenue in 4Q 2011.

We have achieved competitive yield in a relatively short period of the time and our 45-40 product quality have met and exceed our customer’s expectation. We are also collaborating with our Chinese customers in the mobile and tablet area using this particular technology note. Overall in 2011 we have nine new tape out for 45-40 nanometers.

And with our effort in IP investment last year, our 45-40 IP library is increasingly robust and complete and ready to simultaneously support COT and non-COT customers this quarter. This should bring us more new tape out for 45 and 40 nano and widen our opportunity in advanced technology business. Our 32-28 development is on schedule as planned and we target to have that process ready in 2013.

To conclude 2011 was a challenging year. Externally we experienced the supply chain disruptions from Japan earthquake, customers’ inventory issue due to weak economic situation as well as some customers’ technology transition from 65 nano to 45 nano. Internally, SMIC experienced a loss of our ex-Chairman and a major management change, but we have pressed forward and now we are on track in implementing new initiatives as strategy within the company again. I hope that the fruit will be evident in the quarters to come as we were to best serve our customers with differentiated service.

In 2012, the first and the second quarter looked encouraging was a positive revenue guidance for Q1 and indication of a optimistic Q2. We remain cautious and diligent in executing our business plan for the best interest of all of our shareholders.

Thank you for your continuous support and look forward to updating you again in the future. I will now handover the call over to our CFO, Gary Tseng for overall business and financial commentary.

Gary Tseng

Thank you, T.Y. Good morning and good evening to everyone. I will now take a few moments to summarize our fourth quarter and the full-year unaudited 2011 financial results as well as to provide our first quarter 2012 guidance. You may also refer to our quarterly financial presentation on our website. Please note that our currency figures are in U.S. dollars unless otherwise stated.

Looking at the fourth quarter of 2011, total revenue decreased 5.6% quarter-over-quarter to $289.6 million due to decrease in shipments.

Wafer revenue from our managed fab Wuhan Xinxin was $24.4 million in the fourth quarter contributing 8.4% to our total revenue. Excluding wafer revenue from the managing fab for both quarters, our revenue decreased 3.6% quarter-over-quarter. Fourth quarter gross margin was minus 7.4% compared to third quarter’s positive 1.4%, the decrease of 8.8% points was mainly due to revenue decrease and the depreciation expenses increased from Beijing (inaudible) fab ramp up.

Also there was a settlement with EBITDA of $11.4 million charged to our cost of goods sold. If excluding this one-time charge, fourth quarter gross margin was minus 3.4%. Apart from this settlement case, we have no other major litigation pending for the moment.

In terms of our operating expenses the overall OpEx was $85.7 million compared to the previous guidance of $89 million to $92 million. Our R&D expenses in the fourth quarter was offset by government grants of $22.1 million. Without the government grant for fourth quarter, R&D expenses was slightly up by $1 million mainly due to the higher expenses for advanced node development.

In the fourth quarter, there were other operating expenses for a net amount of $12.4 million, mainly attributable to a disposal loss on equipment. Without the government grants and the other operating expense, the normalized the total OpEx was $95.4 million up from $89 million in the third quarter. G&A expenses in the fourth quarter was mainly attributable to personnel related reserve and legal related expenses while the increase in selling expenses was mainly due to expenses on assembling engineering wafers and the mask use to promote sales.

The tax expenses in the fourth quarter was $65 million which include a reduction of $56.5 million in the measurement of deferred tax assets due to the prudent re-estimate of the next few years taxable income to realize the previous deferred tax assets as required by accounting rules. After these adjustment we have remain $31.8 million of deferred tax assets on our balance sheet.

All-in-all, the loss attributable to the holder of ordinary share was $165.6 million in the fourth quarter of 2011. The fully diluted EPS was above negative $0.3 per ADS. In the fourth quarter, our debt-to-equity ratio further lowered to 38.7% from 42.4% as we pay down long-term debt in the fourth quarter.

In an effort to increase the long-term debt to replace the short-term borrowing for a more balanced capital structure, we are pleased to announce we are singing a U.S. $268 million three year credit agreement today with a syndicate of local and overseas banks. This new loan facility will be served as general working capital of the company and a part of it will be used for refinancing.

In terms of cash flow, we generated $80.8 million operating cash compared to $160.9 million in the third quarter. Cash used in investing activity decreased primary due to less CapEx spending in the fourth quarter. Meanwhile, there was cash flow from financing activity as we paid down $186.9 million of long term borrowing.

All-in-all cash and cash equivalents at the end of fourth quarter was $261.6 million compared to $315.7 million in the previous quarter. To look at our revenue by application, revenue from communication was about flat compared to last quarter, contributing 44.1% to our total revenue. Meanwhile demand on consumer product was relatively weak representing a decrease of 12.3% quarter-over-quarter contributing 42.5% of our total revenue.

Regionally, in the fourth quarter the revenue from China increased 4.8% quarter-over-quarter contributing 34.1% to our total revenue. Revenue from North America decreased 5.4% quarter-over-quarter and that contributed 55.9% to our total revenue.

In terms of technology, advanced technology of 90 nano and below declined 5.4% compared to last quarter and has contributed 30.5% of our wafer revenue in the fourth quarter 2011. However, within the device technology revenue, our Beijing 12-inch fabs 65 nano revenue grew 20% quarter-over-quarter and has offset some of the decline. We continue to see momentum in 65 nano orders at our Beijing fab.

Now turning to our capacity. For the whole year of 2011, (inaudible) monthly capacity which does not include Wuhan increased by 12.6% year-over-year. Beijing’s 12-inch fab capacity has increased 25% from 23,300 12-inch wafer per month to 29,100. Shanghai 8-inch fab has increased 4.7% from 89,000 8-inch wafer per month to 90,000.

Shanghai’s overall capacity remain unchanged, but it continuing product mix change in order to convert more capacity for power IC manufacturing. So overall utilization was 65.6% in the fourth quarter. Encouragingly this utilization has increased within the fourth quarter period, especially at our Beijing 12-inch fab as more 65 nano products have finished qualification and the stock – and are starting to ramping up.

Regarding the 2011 unaudited result, our revenue dropped 15.1% year-over-year to $1.32 billion compared to $1.55 billion in 2010. Gross margin decreased from 19.9% in 2010 to 7.7% in 2011. We recorded a full-year net loss of $274.2 million in 2011. For 2012, we maintained discipline in spending and plan to spend above $430 million in CapEx for capacity and the business expansion compared to $765 million in 2011, among which more than 80% of the CapEx is for 12-inch fab equipment mainly to ramp up our 45-40 nano capacity to match with our customers’ demands.

Looking ahead at our first quarter of 2012, we’re guiding our revenue to increase 7% to 9% quarter-over-quarter because of an increase in shipment and our U.S. customers rebound. Gross margin is expect to ranging from 4% to 7% due to revenue and utilization increase. We expect our operating expenses to range from $96 million to $99 million, up from $85.7 million primary due to an increase in depreciation in our Shanghai 12-inch R&D fab and then R&D for the device node development. Capital expenditure for the year of 2012 expect to be around $430 million.

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

En-Ling Feng

Thank you, Gary. I will now like to open 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

Thank you. (Operator Instructions) Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.

Randy Abrams – Credit Suisse

Yes. Hi, good morning. Could you talk about a little bit more on your guidance for a 79% rebound in first quarter relative to some of your foundry peers that are guiding for (inaudible) in first quarter. What’s driving some of your optimism, any particular segments or new customer programs?

En-Ling Feng

Hi, Randy. Yes, we are having some noticeable ramp up in our 12-inch Beijing fab. This comes from communication as well as some consumer sectors. In addition we are seeing a very strong powered management sectors growing and so this is also for the mobile communication area.

Randy Abrams – Credit Suisse

Okay, thank you. And my follow-up question for the 40 nanometer, if you could talk about your targets for a percent of sales for about business required to as we look later this year and what are the (inaudible) how much 40 nanometer business could you support or much capacity do you plan to bring on with the CapEx budget?

En-Ling Feng

Okay. We expect the 40-45 nodes revenue to grow up to about 9% of our fourth quarter by the end of the 2012. This – our present capital budget would give us around 9,000 to 10,000 wafers capacity by the end of the year.

Randy Abrams – Credit Suisse

Okay. Thank you.

Operator

And your next question comes from the line of Daniel Heyler from Bank of America. Please ask your questions.

Daniel Heyler – Bank of America

Yeah, thank you. Good morning. I had a question on the 40 nanometer ramp. How do you intend to be competitive and to grow that business given the amount of excess capacity that we are seeing at most of the other foundries which have talked about upgrading a lot of their internal fabs to – from 65 to 40, will you need to be more say more aggressive in pricing or as you said earlier, there were some, you said there were potential for some niche applications to differentiate with others. Could you just elaborate how you plan to address this market and why customers would tend to use that SMIC in this node?

En-Ling Feng

Okay. Thank you, Dan. The way we are approaching this competitive issue actually is working very hard on our defab density as well as delivering the pilot on schedule on time. In addition we have invent the great mount in our IP libraries. So we are seeing that this – for this generation of technology we have probably the most robust library amount of our all our previous investment. And so we are seeing actually a lot of interest from international as well as domestic customers.

Daniel Heyler – Bank of America

Okay, great. And just few housekeeping questions I’m going to list a few here, could we get your deprecation for the full year target Gary, what the full year number – and what the linearity on the CapEx for the full year, how this is going to break out as a back end loaded or front end loaded? Thank you.

Gary Tseng

Thanks, Dan. For the CapEx as we forecast is $430 million, we expect it will be quite linear as we are ramping up our 12-inch fab in Shanghai. I would expect that the depreciation for full year of 2012 will be somewhere around $20 million to $30 million higher than 2011.

Daniel Heyler – Bank of America

Okay, thank you. And I will flip in one more on the government funding and tax, what do you thinking there in terms of how we should model the tax part of the business model and that would be quite helpful. Thank you. And as well as the R&D credits, how much we should think about this year in both those items, thank you.

En-Ling Feng

For the government, R&D grants it’s very hard to predict. Probably we’ll get year-in-year or quarter-by-quarter unfortunately because the government – government process but in the last few years we’re able to get the grants stumble around from $35 million to $45 million each year. We hope, this year we will be able to get very much the same as history but there is no guarantee at all.

In terms of tax, this is really the adjustment really is according to the continue adjustment. In the next few years, I don’t expect we would have any tax burden if I look at our financial future. Thank you.

Daniel Heyler – Bank of America

And no credit either.

En-Ling Feng

No. I don’t think so.

Daniel Heyler – Bank of America

Okay, great. That’s very helpful. Thank you, gentlemen.

Operator

Your next question comes from the line of Steven Pelayo from HSBC. Please ask your questions.

Steven Pelayo – HSBC

Sorry, can we talk little bit about sustaining profitability, what type of gross margin levels you think you will need to do that. I think in 2008 you were doing $400 million revenue quarters but spending roughly $80 million in OpEx, now you are kind of guiding to the – I don’t know as much as the $100 million range. I’m curious has the breakeven rate actually increased a little bit, can you just help me understand that this goal – sustainable profitability, and what would be the business model look like at that level?

Gary Tseng

Thank you, Steve. Basically as we moving into the 14-nano era we hope, when we ramping up our capacity, we will be able to increase our SP in term improve our margin but as 40 nano is more expensive, we have to work very hard, in order to bring up our margin. Our current breakeven point I would say not necessary higher than the past target which at this point I’d say 80 to 85 is our target, but we are right now, somewhere on around 80% utilization should be our breakeven point. Did that answer your question?

Steven Pelayo – HSBC

I guess I was more interested on the margin side ultimately what type of gross margins would you likely needing to do? If I assume you’re doing $100 million a quarter in operating expenses roughly, 20% gross margin and roughly kind of talk about doing $500 million quarters and rates so that’s a big revenue number away. So I am trying to understand what the gross margin would be at a breakeven level?

Gary Tseng

Okay. Steve, well basically I think our current net quarterly run rate is somewhat in the low side of our last eight quarter’s history. I would expect if we can operate right, our sales – we hope we will be able to bring up in the significant pace into the future. Still we expect operational expenses should be somewhere around 20% to 22% of our sales, but as our SKU is increased, this may going down to somewhere around 18%.

Right now we have the 12-inch R&D fab in Shanghai which cost us a lot of money but as we starting to ramping up the fab into a production fab for 40 and 40-nano production. We may consider bring up this expenses from the OpEx into above the gross margin line, least will be take away the gross that the OpEx somewhere around 7% to 9% expenses from the bottom to the up, but still we will see how we operate the fab until we make the further decision.

Steven Pelayo – HSBC

And then I noticed the long term funding that you guys did with the banks syndicate, you foresee that you will need any more here or with the low CapEx do you think you have the cash flow to sustain, I guess is there any more funding requirements you think this year?

Gary Tseng

Steve, we are talking now, it’s all on the $430 million CapEx then we probably would be able to free cash flow from operation. So there is no need for the further funding. But on our balance sheet, everybody know this, we have a lot of short-term funding compared with the long-term funding. So one of the key target we would like to have is to convert these short term funding into a long term funding. So with that in mind, we will still need to have a long-term funding while reduce our short-term funding.

Steven Pelayo – HSBC

Okay and then final question as you’re talking a little bit about looking to differentiate and going to some of these niche markets, I guess could you talk a little bit more about that, how big the market opportunity is I don’t know, what would you say those currently contribute to revenues and what they could potentially be?

Tzu-Yin Chiu

Hi Steve. This is T.Y. Okay, long term wise, actually we see quite a few areas where the SMIC can specialize in itself. For example in this smartcard application area we know that China is moving in that direction and it has been actually announced that by 2015 all the bank cards will be actually be smartcard based bankcards and this will give us a great opportunity in the smart banking areas.

And other areas that we are actually having a good presence on the power management ICs. We have seen significant increase in our revenue and we are also actually already working on the next generation process. So, this is an area where we are going to – how do I say it – put some more emphasis. There are other areas that SMIC has heavy presence in China and we will continue to invest in the advanced technology in this specialty application area. At this moment, I’m not at the liberty to review every technology areas where we are targeting.

Steven Pelayo – HSBC

Okay and then just a final quick question on 2011, I guess things complete. Could you talk a little bit about customer concentrations and number of customers in the fourth quarter 2011 both would be preferred that were above 10%?

Gary Tseng

Could you repeat that question again?

Steven Pelayo – HSBC

I’m wondering if you could help me understand your customer concentration. How many customers you have that are more 10% of revenue either for the full year of 2011, I assume you have to disclose that for your financials, but I was also even interested down here at the bottom in the fourth quarter 2011? How many customers you had over 10%?

Gary Tseng

Okay. The top five customers contribute above 50% – and above 50% of our total revenue. The top two customers contribute about greater than 10%.

Steven Pelayo – HSBC

Each year combined?

Gary Tseng

Combined. Each – I’m sorry.

Steven Pelayo – HSBC

Okay.

Gary Tseng

The top two customers, yes each.

Steven Pelayo – HSBC

Okay. Excellent. Thank you very much.

Operator

Your next question will come from the line of Donald Lu from Goldman Sachs. Please ask your questions.

Donald Lu – Goldman Sachs

Good morning Dr. Joe, Gary and En-Ling. My first question is more long-term strategy question. I think if you look back in the history of SMIC, the company raised about over U.S. $4 billion and now you end up with over $500 million net debt, and with apparent to the cash flow probably even in the near term.

And also if you look at your CapEx this year it’s $430 million relative to you once had $2 billion and TSMC is $6 billion. I don’t know about global foundries but given this parent companies have probably unlimited cash there. It’s probably going to be pretty high and I mean it doesn’t seem like SMIC is going to gain a lot of market share at 4G and 28 nanometer. So, what would be your like mid to long-term strategy here?

And you’re going to try to become a profitable shareholder friendly company or there a Chinese government strategy that would enable you to pursue leading edge technology and remains to be a player in the leading edge?

Gary Tseng

Okay, Daniel. Thank you for this good question. I’d definitely – our overall strategy is to become profitable but that does not mean that we will abandon our overall position in this foundry market. Our short term strategy definitely is to increase our fab loading and leverage all the investments we have already made fully.

Thus we have we can achieve through yield quality and service and deliver on our commitment to our customers and we have seen some of these results in terms of the increase in the loading both in the 8-inch as well as in the 12-inch fab. I think you’ve seen – excuse me – I think it is, we need to first demonstrate this capability instead of really continue to invest without fully leveraging the fab investments.

Our second strategy is to execute accurately on our 45 and 40 ramp and this we have shipped quite a few number of 45 pilots with our customer has been very-very satisfied. We also have shifted 45 nano initial production wafers by the end of last quarter. So our customer end system qualification is ongoing and our investment here is definitely will be tailored to our customer demand and so we have – we will keep our investment closely (inaudible) flexible if there is a customer ramp up expectations, definitely I think we have the commitment to increase our investment here.

So overall these are the two important short-term strategies. We are executing these and with a good result so far and I think we hope that this will bring us back to a position where we can become profitable and be – in the future starting to increase the capital expenditure again. Does that answer your question?

Donald Lu – Goldman Sachs

(Inaudible) up there. Yeah is there any new supporting policies or plans from your – from the Chinese government or your majority shareholders to facilitate your – the strategy you just commented. I mean the reason I’m asking is, if you look at the history of the foundry industry there is pretty clear precedence before like that one is chartered, which is more like the leading edge, trying to maintain the R&D and another would be companies like Huawei and (inaudible) probably of familiar risk or more like mature technology focus, but I mean apparently you can’t do both. So, as I got the government here play a major role, so maybe you can give us some insight into what’s new here from the government supporting side

Gary Tseng

We continue to get actually a very strong support from the both local as well as the central government in terms of our R&D effort. So just – I think Garry had mentioned R&D grant. We definitely have projects to a new technology and once we complete the technology and demonstrate its manufacture ability these grants will be given to us. And so therefore we feel that there is sufficient support from our general government policy here in China.

Donald Lu – Goldman Sachs

And how much would be the R&D grant per year going forward?

Gary Tseng

Well, as I said, or at least (inaudible) as I said earlier the government grants is not a fixed format to give you a fixed amount as we go through the different project and it depends on your deliverable and they will give you next grant and so on, there is a reason why we never be able to forecast how much we will receive but as I said earlier.

Donald Lu – Goldman Sachs

How much was the grant last year?

Gary Tseng

In the last few years we have been able to receive from $35 million to $45 million each year, year in year out, for the last year specifically is $46 million.

Donald Lu – Goldman Sachs

Okay, great. Thank you.

Gary Tseng

Thank you.

Operator

Your next question comes from the line of Rick Hsu from JP Morgan. Please ask your question.

Rick Hsu – JP Morgan

Yeah, hi good morning. I think first of all congratulations to your 40 nanometer ramp up that has started contributing to your top line. So I think my question is can you, can you be a little bit more specific how are you going to see the 40 nanometer ramp up trend throughout a whole year in terms of revenue contribution is that on Q1 to Q4?

Gary Tseng

Okay, I think at this moment, at this moment we are targeting our major ramp up of the 40 nanometer on the second half of 2012. So during the first two quarters our product is still going through proliferation as well as I guess customers system qualification as well.

Rick Hsu – JP Morgan

So is that fair to assume... yeah, yeah, so I’m just thinking is it clear for us to assume may be some single high single-digit contribution in second half of this year.

Gary Tseng

Yes. By the fourth quarter we hope to have around high single-digit, 5%.

Rick Hsu – JP Morgan

Okay, excellent. Thank you. My second question is on your SG&A guidance for Q1 and it looks US$96 million to US$99 million, it looks to be above the normal level. And I think Gary explained this part partially that there was the Shanghai 12-inch R&D facility start up cost and my question is, is this going to be just one-off or is going to last for several quarters?

Gary Tseng

Well, first of all the Shanghai 12-inch fab ramping up will be continuous. Right now our Shanghai 12-inch fab has somewhere around 4,000 40, 45 nano capacity and we expect to ramping it up all the way towards the end of the year is some around 9,000 to 10,000.

With this increase ramping up depreciation will be increased so if we keep this fab under OpEx line then definitely the OpEx will be going up significantly. However, if we bring this line up to above the gross margin, currently we expect across the whole year the OpEx expenses without this 12-inch fab will be quite stabilized. We don’t expect it will be increased actually we control it, it would be very, very tight. Thank you.

Rick Hsu – JP Morgan

Okay. Thank you so much.

Operator

Your next question comes from Szeho Ng from BNP. Please ask your question.

Szeho Ng – BNP

Hi, good morning, gentlemen. I just want to know if you have any plan to get into a second inter post production the rate you digest some of you 65 nano capacity?

Gary Tseng

At this moment (inaudible) project is under our R&D organization and we will not be going into production in the short time.

Szeho Ng – BNP

I see, okay. And also very quickly can you talk about pricing environment, may not fall, I say 65 nano and 99 in the market, yeah, that would be helpful.

Gary Tseng

Say that again, please.

Szeho Ng – BNP

Okay. Can you talk about pricing environment right now for 65 nano?

Gary Tseng

Actually, we think right now our pricing is pretty competitive and but is stable. And so, our main trust is to increase our 65, 55 fab utilization.

Szeho Ng – BNP

Okay, all right. Thank you very much.

Operator

Your next question comes from the line of Daniel Heyler from Banc of America. Please ask your question.

Daniel Heyler – Bank of America

Thank you. Just a couple quick follow-ups for Dr. Tzu. I wanted to focus on what the new management team is doing on a forward basis, now let’s actually happen. So, I think on the first part on the mature technology front on your strategy there as you role this out, what is your profitability levels on the 8 inch and is this power management contribution going to be accretive and I also wanted to understand more on the NAND – on the flash memory contribution whether that actually enhances the profitability of the 8-inch fabs. Thank you.

Gary Tseng

Okay, the embedded Novel Technology of market segment that we are targeting will have a profitability that is above our normal average okay. As far as the power management IC it will be depending on the customers but in general we are satisfied with its margin.

Daniel Heyler – Bank of America

Okay and what’s driving this surge in power management? Are you seeing that its IDM outsourcing picking up (audio gap) talked about this pickup as well?

Gary Tseng

This is from a fabulous company.

Daniel Heyler – Bank of America

Excellent. Okay and then on the advanced technology strategy I wanted to understand the operational dynamics here 40 nanometer ramping in Shanghai, 40, 45 typically of one fab would have a multi process fab technology such as you can move away per capacity around and operate more efficiently? Will the Shanghai fab be able to do 65 and will it able to do 28, if you just elaborate more I know you’ve talked about ramping 40, 45 this year though I’m wondering what the longer term technology strategy there.

Gary Tseng

Yes, Shanghai fab will be able to do 28 nano as well, but there is no plan to push on height talking to fab to Q65.

Daniel Heyler – Bank of America

Okay and then on the Beijing fab maybe is that going to just remain at 65 or do you plan to migrate that forward to 40?

Gary Tseng

When there are sufficient customer demand Beijing fab is capable also to move to 45 as well as 28.

Daniel Heyler – Bank of America

Okay, great, thanks. And one just a quick one if I can, could you tell us the contribution of that memory is because you talked about that being a fairly strong business in the fourth quarter so what’s the contribution for the non-volatile and where do you see that growing over the next two quarters thank you?

Gary Tseng

Well, actually our fourth quarter we experienced some of our memory customer going very strong especially for a local Chinese market. We will not declare in depth the specific market percentage we have, by going forward I believe this specific customer should be able to get more market share. In terms of application – in terms of application will be (inaudible) market especially for a China market in a significant way. We expect we will be able to grow our lease application, product, market share with this customer significant into the future.

Daniel Heyler – Bank of America

Oh, just sorry, a little more of few details if I may what was the revenue contribution in the fourth quarter and where do you see it going and also is this may be elaborate on what process now you are using to ramp this as well, thank you.

Gary Tseng

Again, we will not disclose in detail but that will be all contributed from the 65.

Daniel Heyler – Bank of America

Okay, excellent Thank you very much, Gary.

Gary Tseng

Thank you.

Operator

The next question comes from the line of (inaudible). Please ask your question.

Unidentified Analyst

Hi. Good morning (inaudible) couple of the information I’d like to double check with you and the first on the depreciation expensive and how many percent year-on-year growth and for this year you are taking and how about the capacity expansion how many percent year-on-year growth?

Tzu-Yin Chiu

In terms of the depreciation, as I said in earlier, we will probably increase somewhere around 20 to 30 million in depreciation expenses from 2011 to 2012 or you can say somewhere round 5% to 7% there will be very much in a depreciation side and your other question is?

Unidentified Analyst

Capacity growth for years?

Tzu-Yin Chiu

The capacity growth – for the most of the capacity will be stay very much like the last year. The only increase will be in the Shanghai 12-inch fab, which is from 4,000 to somewhere around 9 to 10,000.

Unidentified Analyst

Forecast that is where the (inaudible) Shanghai fab expansion had a 40/45 nanometer processor will probably forecast the productive competitive growth is like that low single digit year-on-year growth?

Tzu-Yin Chiu

Well, somewhere around – will be a little bit higher than the low single digit. I will say in the mid single digit.

Unidentified Analyst

Mid single digit? Thank you, and by the way in terms of the China, the fab (inaudible) high, I remember at the early stage over the conference call you highlight the revenue percentage wise and how many percent year-on-year growth, would you mind highlighting again?

Tzu-Yin Chiu

Our China revenue growth is 15% from 2010 to 2011 and it contributed 30.6% of our total 2011 revenue. We would expect this growth pace will be continue into the 2012.

Unidentified Analyst

Okay. And what kind of revenue percentage contribution you predict for the year 2012?

Tzu-Yin Chiu

For China market?

Unidentified Analyst

Yes from a China client. I think that probably...

Tzu-Yin Chiu

From a China’s client.

Unidentified Analyst

I think that probably pretty much – right.

Tzu-Yin Chiu

Well at this point of time I would expect- I will say this is really too early to be declare this number because for the 2012 especially for the second half there is still a lot of variable. So I would – well best to get as we used to do the biggest market share in our China market and definitely we get the majority of the share from our China customer. Thank you.

Unidentified Analyst

Okay. You provide the market share, so how many percent the market share you believe you take for lost China, the IC maker, with that said fab maker, you’re approaching and for their foundry loading how many percent you think?

Tzu-Yin Chiu

At this point of time, I cannot disclose all comments on 2012 specific number yet.

Unidentified Analyst

Okay. How about for year 2011 for all operating China the IC design half, for layout foundry loading how many percent you put in, you take over from their foundry sales?

Tzu-Yin Chiu

In the past we calculate and we since we can occupy 50% but specifically for 2011, I would expect we should be able to get very much the same percentage.

Unidentified Analyst

Okay, thank you. And the last question and for your China client it’s very clear SMIC and it’s a farewell for them to do the cost down, and so my question is what kind of strengths that you believe you, I mean, what kind of aiding, the radio ultra aiding transit you think you will have produce here and two to maintain our increase market share and what kind of application and for your China clients and will be the main business for SMIC?

Tzu-Yin Chiu

Okay. I think to gain the China’s customers I think we have to identify quite a few customers that can utilize our technology very, very how do I say it’s a very, very good match. The, for example, we are working with our customers in the smartcard area and in the CIS area and these are old areas we feel well we can have significant presence and a significant increase in the market share in China as well. Does that answer your question?

Unidentified Analyst

Okay. How about this way? What kind of retention and is the majority of the business and applying your China (inaudible) application, I think the (inaudible)?

Tzu-Yin Chiu

Okay, okay. I think our customers from all sectors. We’re seeing a strong growth in the mobile communication as well as we’re seeing some early sign of growth in our export market.

Unidentified Analyst

I see. Thus many added 55 nanometer deposits, I believe in 40-nanometer process, right.

Tzu-Yin Chiu

That’s correct. That’s correct.

Unidentified Analyst

Okay. Thank you, Tzu-Yin Chiu. Thank you, En-Ling.

Tzu-Yin Chiu

You’re welcome.

Operator

Thank you. This is the end of the Q&A session. I’d like to hand the call back to Tzu-Yin Chiu for the closing remarks.

Tzu-Yin Chiu

In closing, I’d like to take this opportunity to thank all of our shareholders, customers, employees and suppliers for their trust and support. We also thank the analysts who participated today for their questions and comments. And we’ll see you next quarter. Bye, bye.

Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Semiconductor Manufacturing International's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts