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Semiconductor Manufacturing International Corporation (NYSE:SMI)

Q1 2012 Earnings Call

May 10, 2011 8:30 PM ET

Executives

En-Ling Feng – Senior Director, IR

Tzu-Yin Chiu – CEO

Gary Tseng – CFO

Analysts

Randy Abrams – Credit Suisse

Steven Pelayo – HSBC

Patrick Liao – Nomura Securities

Patrick Liao – Normura International

Szeho Ng – BNP

Eric Chen – Daiwa Security

Rick Hsu – J.P. Morgan

Operator

Welcome to the Semiconductor Manufacturing International Corporation First Quarter 2012 Webcast Conference Call. Today’s conference call is led by Dr. T.Y. Chiu, Chief Executive Officer; Mr. Gary Tseng, Chief Financial Officer; and Mr. En-Ling Feng, Senior Director or Investment Relations.

Today’s webcast conference call will be simultaneously streamed through the internet at MSIC’s website.

(Operator instructions)

The earnings press release is available for download at www.smics.com. Webcast 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, Senior Director of Investor Relations, for the cautionary statement.

En-Ling Feng

Good morning and good evening. Welcome to SMIC’s first quarter 2012 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 earnings press release and the quarterly financial presentation are available for your to download at www.smics.com under investor relations, event and the presentation section.

Please also be reminded of the Safe Harbor statement, which provides as follows. SMIIC’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 April 27, 2012.

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. Thank you for joining us for our earnings webcast.

Let me first talk about the solid progress we have been making on our vast utilization over the past few months. Revenue grow above 15% quarter-over-quarter as overall utilization reached about 74% in the first quarter of 2012, improved from 66% in the fourth quarter 2011.

We see this momentum continue as utilization further increased into the second quarter. This continuous growth is primarily due to new product ramp-up, for example, connectivity chips, mobile phones and the set-top box as well as a demand increase for some of our existing products, such as power management IC, E-squared prom and others.

I mentioned in the past, our near-term strategy is to focus on boosting overall fab utilization and efficiency, which we have performed quite well as illustrated by our first quarter result.

Our Beijing 12-inch fab, which was preparing for ramp-up in the first quarter, is experiencing strong loading with a 40% quarter over quarter increase in 65/55 revenue. Beijing’s growth driver was mainly from smartphone and networking applications. Furthermore, we expect Beijing 65/55 revenue to grow additional 50% in the second quarter as we complete qualification for 65 nano products. In the area of broadband tablet connectivity, that will enter production soon. And we also target to enlarge the Beijing 65/55 capacity at 30% this year.

Fab specific, our Shanghai 8-inch aluminum fab loading is also strong. Not only driven by powered [inaudible] IC, CMOS image sensor in embedded EE. We have successfully transferred the CMOS image sensor in the embedded EE for our Shanghai 8-inch Fab to Tianjin Fab. And time of type capacity enabling such compatible process capability between Tianjin and the Shanghai Fab will better our flexibility in order to accommodate customer demand.

A number of products has completed qualification as Tianjin Fab in the first quarter and will enter into full production in the second quarter. Therefore, we will also see a strong utilization improvement in Tianjin Fab in the second quarter.

There are ways in which we are tackling our short term strategy. And now I would like to address our longer term differentiation strategy. To share an example of our differentiation strategy at work, our – each [inaudible] differentiation is well underway and has resulted in good demand.

We offer aggressive [inaudible] and best of class power consumption for imbedded embedded EEPROM. This low-power cost effect foundry is used to address smart card market both contactless and the dual interface applications. That’s why at the collateral mobile product applications that requires extremely low power consumption as well as imbedded non-volatile memory.

In addition, we have also developed a high-speed version, which will be ready this year. As a result our imbedded EEPROM will see increasing interest from the customers and the order for this technology are forecasted to grow healthily this year.

From quarter one to quarter three, the embedded EEPROM shipments are targeted to – are more than doubled. Operationally, besides working on our normal service indexes, we’re emphasizing efficiency enhancement. This is our efforts our Shanghai 8-inch Fab wafer out will grow by more than 15% as compared to our [inaudible] plant, however, with minimal investment.

This is done through equipment productivity improvement as well as to reactivate some of the low [EDA] tools back into production. Already we this result for our enhanced manufacturing efficiency in quarter one. While our revenue increased 15%, our gross margin improved by 14% and the operational margin improved by greater than 20%.

However, to improve time to market is very – improved as well. We have a delivered a 55 product from [inaudible] to production in merely four months when the normal time spent should be two to three quarters.

Now let me talk a little bit about China market. Our China revenue continues to grow along with China semiconductor market. In the first quarter of 2012, our China revenue grew 9.5% quarter-to-quarter, equivalent to about 32.5% of our total revenue in the first quarter 2012.

The overall demand in China is still relatively strong primarily driven by feature phone, smartphone, tablet and set-up boxes. Set-up box for example will benefited by the launching of the advance satellite broadcasting system. That is ABS-S. Initiated by China State Administration of Radio, Film, and Television in 2011. This year, the coverage will further expand to nine more provinces and the estimated demand for this satellite STB is around 16 million units according to China’s State Administration Radio, Film, and Television.

Currently, we see continuous momentum in China in the second quarter especially for products relating to tablets and the set-up boxes. These products require more advanced technology and we are witnessing China migrating to more advance IC development.

On the advance technology front, we are pleased to announce our first 65 nanometer b-top [inaudible] slash entering into risk production at the end of Q2. This product will be widely adopted by feature phone producers in China.

As for 45 and 40 nanometer, we begun 45 shipment in the fourth quarter of 2011 and we are encouraged by our recent 40 nano progress as well. A number of 40 nano product are going final system clock and will commence volume ramp in the second half of 2012.

We are experiencing increasing – increased interest in the second quarter and the rising 40 nano [inaudible] from the both international as well as domestic customers. Our 28 nano development is on schedule as planned. And we target to let the process ready in the late 2013. We have also recently announced that we are collaborating [IBS] to expedite our 28 nano process.

On the financial front, we have successful attained two major loans in the first quarter of 2012. First, we obtained 268 million loans in February and a second 600 million syndicated loans in March. These credit arrangements show that policy banks and commercial banks recognize our potential and furthermore has helped us achieved a healthy capital structure.

In conclusion, we are excited about the growth aspect – growth prospects of the second quarter of 2012. As a result, for the second quarter of 2012, we expect to have increased the revenue and continued utilization, improvement, and also improving gross margins.

Moving forward, we will continue to focus on sustainable profitability and being the preferred foundry provide in China as we continue partnering with global and domestic partners. In order to achieve this, we will continue to execute our long term strategy in maintaining our technology investment as well as to pursue value added differentiation.

Thank you for your continued support and look forward to your updating – we look forward to updating you again in the future.

For the first quarter of 2012…Oh, thank you very much.

Gary Tseng

Thank you, T.Y. Good morning and good evening to everyone. I will now take a few moments to summarize our first quarter 2012 financial result and then provide our second quarter 2012 guidance.

You may also refer to our quarterly financial presentation in our website. Please note that all currency figures are in U.S. dollars unless otherwise stated. The first quarter of 2012 was a very good start for the company. We experienced stronger than expect growth in both revenue and the gross market that we raise our first quarter 2012 guidance in early April.

For the first quarter of 2012, total revenue increased 14.9% quarter over quarter to 332 million due to robust demand across board. We have a revenue of our managed [inaudible] Tianjin was 22.4 million in the first quarter, contributing 6.7% to our total revenue, excluding wafer revenue from the managed fab for both quarters our revenue increased 16.8%.

Fourth quarter growth margin was 12% compare to previous quarters up 7.4%. There were several major drivers for our first quarter growth margin achievements. The improvement of 19.4% bounced quarter-over-quarter, with the result of increased utilization and achievement as well as manufacturing cost selling initiatives.

In terms of operating expenses, the overall OpEx was 90 million including the government grants of 3.8 million. Therefore, the normalized OpEx for the first quarter was 93.9 million. This was obviously lower than the guided range of 96 to 99 million as there was less R&D expenses spent on engineering wafers due to increased efficiency in R&D during the period.

The loss attributable to holder of ordinary share was 42.8 million in the first quarter of 2012. The fully diluted EPS was negative 0.1 per ADS.

Moving to the balance sheet, in the first quarter, we were pleased to close two syndicated loan which include 268 million three years syndicated loans for SMIC Shanghai and 600 million seven years syndicated loan for SMIC Beijing.

During the quarter, we drew down 380 million from these syndicated loans. Part of which was to refresh certain loan to achieve a healthier capital structure. Therefore, the short-term debt percentage was improved from 90% of total debt in the end of fourth quarter of 2011 to 60% at the end of the first quarter of 2012. We target to further improve our ratios to achieve a good balance.

In terms of cash flow, we generated 35.8 million operating cash compare to 84.7 million in the fourth quarter 2011. Cash used in investing activity increased mainly due to an increase in CapEx spending on ramping up the Shanghai 12-inch fab for 40 and 45 [inaudible] technology.

And for cash – from financing, there was an inflow of 210 million after we draw down 355 million of our long-term debt and to repay some short-term debt.

All-in-all cash and cash equivalents at the end of first quarter was $300 million compared to $261 million in the previous quarter. To look at our revenue by application, communication application was our biggest contributor to revenue growth, which increased from $127.7 million in both quarter 2011 to $160.7 million in the first quarter of 2012 a sequential growth of 25.9%.

Meanwhile, consumer grew from 123 million to 133 million with a sequential growth of 8.6 million or 8%.

Geographically, our revenue from U.S. and China grew 13.5% and 9.5% respectively. In terms of technology, 90 nano and below increased 20.2% contributing 31.2% to our wafer revenue in the first quarter.

For capacity, our Shanghai inch fab adjusted from 90,000-inch wafer per month to 79,000 mainly due to power management IC of [inaudible] location. And there was OpEx to 90,000-inch wafer per month by the third quarter this year in our current technology mix.

During Q1, there was no change to Tianjin and Beijing capacity. But at the second quarter of 2012 (Tianjin debt) ramp up to 34,000 12-inch wafer capacity per month. The overall utilization was 74.1% in the first quarter. Utilization rate increased month by month within the first quarter.

We are currently using this momentum into the second quarter and a positive sign of continuation into the second half.

Looking ahead at the second quarter of 2012, we are guiding our revenue to increase 19 to 21% because of increased demand from customers rebound. Gross margin is expected to ranging from 19% to 22%. We expect our operating expenses to ranging from $101 million to $204 million due to an increase in R&D expenses for device node and large development.

I will 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

(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. Yes, thanks.

First question is on the business OpEx. It looks like your capacity is starting to get tight. I wanted to get a sense if you’re now having to turn away any business due to capacity tightness and what your plans might be to pull and spending or ramp-up of the balance sheet to be able to do that if that need arises.

En-Ling Feng

Okay. Hi, Randy. Yes. We are having a strong customer demand. But at this moment, we are not turning away any customers loading. And especially that we are trying to improve our capacity mix by doing some investment, small amount of investment adjustment.

And so, we hope to be able to increase our 65/55 capacity from the current 17,000 wafers to eventually by the end of the year to 24,000 per month.

Randy Abrams – Credit Suisse

Okay. Thanks for that. And with the 20% or so growth that you’re guiding, could you talk about how broad-based market and application is driving the strength? And I guess it sounds like if maybe it hasn’t hit you hit if lead times are stretching out or you’re sensing customers starting to get a bit over aggressive with their orders.

En-Ling Feng

Okay. We are seeing across the board an increase in demand. But there is specific strong area in the communication, especially in the smartphone area. Okay. Yes, the queue time is stretching out somewhat. But I think it’s still within a reasonable queue time. Yes.

Randy Abrams – Credit Suisse

Okay.

En-Ling Feng

Does that answer your question?

Randy Abrams – Credit Suisse

Yes. No, that’s all right. I guess it’s more of the sense of queue time stretched out too much. Customers may take on more buffer inventory and to drive a little bit of overeating.

I guess the question I had on the OpEx, which looks it’s stepping up to new level. And is some of that tied to the new IBM arrangement moving to 28? And should we assume that’s a new level of OpEx and are there any subsidies we should factor in that could change that or do you think that’s the right level of OpEx and then we grow after than level?

Gary Tseng

Randy, the OpEx hike is coming from two reason. The first one of course we are starting to speed up our 28 nanometer within ourself and this will increase our wafer spending and uni-wafer spending and the rest. This is part of the reason.

For IBM investment, this does not hit our OpEx in a significant way. So mainly, the OpEx high is coming from our own [inaudible] development to speed up.

Randy Abrams – Credit Suisse

Okay. And could you maybe talk about your expectations for – if there’s any subsidies factored into that or you expect – maybe you’re not modeling it but what potential as we move through the year for some subsidies that could benefit the OpEx?

Tzu-Yin Chiu

Well, we are fortunately always been able to get the support from the government grants and this help us a lot. Historically, on a yearly basis, we always can receive somewhere around from $40 million to $50 million dollars grant from the government. And this will help us a lot.

Randy Abrams – Credit Suisse

Okay. Thanks for that.

Tzu-Yin Chiu

Thank you.

Operator

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

Steven Pelayo – HSBC

Great. Congratulations on the strong rebound here. I’m curious about the strategy to find sustainable profitability. Could you talk a little bit some of those efficiencies and what it’s doing to lower you effective break even utilization rate? It looks like, still based on guidance, you’re still going to lose a little bit money on the operating profit line. Can you talk a little bit about to have a breakeven level from a utilization rate and mix perspective? What do you think you need to do that?

Tzu-Yin Chiu

Indeed, we are spending quite a bit of time on the efficiency improvement then we are seeing some result already this quarter. So we believe that the break-even line, the break-even utilization is already moving down. Exactly what is the number, I am not at this point to tell you at the time, but in due time when you see – we fail to break even, you will see that number in a more accurate form.

The way we are doing it basically is to improve the productivity of the hold factories by looking very carefully at the productivity of each tool. So one example that we are to improve our Shanghai aluminum line capacity by about 15% without doing much of any investment.

Steven Pelayo – HSBC

Okay.

Tzu-Yin Chiu

Does that answer you?

Steven Pelayo – HSBC

Yes, a little. But I guess – I’d like to be a little more specific at some point. But that’s fine; we can follow up on that later. Your guidance – when I look at the Wuhan revenues. It looks like they did 22 million in Q1, 7% of revenues or so. So you’re seeing as much as 12% of revenues in Q2. So this would imply actually Wuhan is maybe doubling revenues quarter-on-quarter. Is there something going on there or…?

Tzu-Yin Chiu

Yes. In quarter one; our Wuhan utilization is still not very high. And going into second quarter, we are seeing a significant improvement in the Wuhan utilization.

Steven Pelayo – HSBC

Okay. So that should be the new kind of quarterly run rate for you guys doing 40 million to 50 million a quarter from Wuhan or [inaudible]?

Tzu-Yin Chiu

(Inaudible).

Steven Pelayo – HSBC

I’m just doing it based on 11% of your guidance gets you roughly 44 million in revenue, if not more.

Tzu-Yin Chiu

It should be the case. Yes.

Steven Pelayo – HSBC

Okay. Good. And then the last question that I have was – you talked about capacity of 65/55 nanometer. I’m [inaudible] if you can talk a little bit about the 4X node what you say exiting this year? Maybe you can just give us some qualitative feel, also a number of customers. I know that you have a little bit of revenue from the 4X node already. Help us understand how that’s going to rate between now and the end of the year? What do you think your exit run rate of capacity is?

Tzu-Yin Chiu

Okay. We are budgeted to have about 10,000 wafer for our capacity by the end of the year. Of course, the total capacity eventually [inaudible] depends on the customer demand of strong lead. So we have about four customers that already have paid off the tape out and having product demonstrated as doing the [inaudible] and customers qualification. So we expect this 40 nano technology to ramp in the second half of this year as before.

Steven Pelayo – HSBC

Okay. And then just a second – I have one final housekeeping kind of question. Given the stronger demands trends, you’ve shored up the balance sheet a little bit as well. Does that change any of your CapEx and depreciation outlook for this year? Can you just give us a reminder on what you think those two numbers will do this year?

Gary Tseng

Steve, this is Gary. At this point of time, we are not intent to change our CapEx number yet. We are very [inaudible] on this cycle and we would like to the best that utilize our current capacity. As T.Y. mentioned in his speech, we are in a pretty good scale to use the [EDA] machine and to improve the fab utilization, the tool efficiency improvement. And this, as we can see, it’s pretty set by what we see into the future’s need.

But definitely, if there is a very strong demand from the customer in the next few months, definitely, we will consider to increase our CapEx.

Steven Pelayo – HSBC

Okay. And I’m sorry, I just want to re-verify. The number that I have you for is roughly around 450 million is CapEx this year with depreciation relatively flat year-on-year, is that correct?

Tzu-Yin Chiu

The CapEx is 430 million and the depreciation is pretty flat. Yes.

Steven Pelayo – HSBC

Okay. Great. Thank you.

Operator

You next question comes from the line of Patrick Liao from Nomura Securities. Pease ask your question.

Patrick Liao – Nomura Securities

Thanks for taking my questions. My first question is about 28 nanometer given that will be likely two kinds. So for [inaudible] and [ballast]. I just want to get a sense about what the rationale are guys are thinking to do especially versus [inaudible] in the broad base likely. Thank you.

Tzu-Yin Chiu

Actually, yes. We have actually announced our 28-nano technology and this is high-K middle-K [inaudible] technology.

We also are working – sorry. We also are working on the – a poly/SiON 28-nano as well. So both versions we have in our R&D.

Patrick Liao – Nomura Securities

Okay. Thank you. So can I ask the feeling that do you think poly/SiON or high-K will get a demand, which one will come first or higher, just a kind of sense will be very, very appreciated.

Tzu-Yin Chiu

This part actually I would like to refrain from comment because we will [cater] our – on this schedule as well to our customer demand. And there are demands in both technology area.

Patrick Liao – Nomura Securities

Okay. That’s clear. My second question is about China’s market. I think you mentioned about EEPROM, CMOS sensor and power management and so on like [inaudible]. Can I get a feeling or sense that – which part you think likely – most potential in growth perspective? And how the idea of the clearance demand, just the – which one do you think would be more important to watch – would be a [inaudible] thing?

Tzu-Yin Chiu

Actually, all of the bulk is very important area for our differentiation. And so of course, each technology area is targeting at the different sectors of application. So, we are working very actively and having our development program in all these areas and then we do have enough of experienced personnel’s to take care of these development efforts.

Patrick Liao – Normura International

Question for me is about the growth margin of different products, actually. So, question one could be for our modeling in terms of growth margin driver for China market. I mean, what kind of product do you think we should think of the kind of earnings? That’s actually the question I have in mind.

Tzu-Yin Chiu

Better earnings.

Patrick Liao – Normura International

For example with E-square, or what?

Tzu-Yin Chiu

I believe that if we can do well, for example, in the E-square area, we are tailoring specifically at very low-power application and where we think our technology has specific advantage over other offerings we will extract a better margin.

Now, that is the case in the CIS as well. We need to, of course, develop the right technology in the CIS area as well.

Patrick Liao – Normura International

Okay. I think that answers 99% of my question. Just one follow-up, could you give us some colors for CIS? What is the reason, you mentioned, on why we should emphasize [inaudible]?

Certainly, we believe in this. But more color will be great for CIS.

Tzu-Yin Chiu

Okay. We are already the largest CIS product provider in China. So, we just intend to continue to exercise our strength here. But to add additional feature to the technology so that it can address the advance high pixel CIS market area.

Patrick Liao – Normura International

So, if I think there should be [inaudible] technology or coming up, would that be right guessing?

Tzu-Yin Chiu

That’s correct.

Patrick Liao – Normura International

Okay. Thank you, Sir. That’s my question.

Operator

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

Szeho Ng – BNP

Hi. Good morning. I just want to know what’s the percentage of your revenue is coming from the smartphone, tablet market?

En-Ling Feng

I’m sorry, can you ask again?

Szeho Ng – BNP

Oh, the percentage of revenue coming from the smartphone and tablet market.

En-Ling Feng

Well, it is somewhat hard for us to give such specific because of our customer’s customer. We never know where they put their [inaudible]. But definitely the communication has been over 55% of our sales. And I believe most of the communication right now in the market should be put into smartphone and tablet.

So, I believe a big part of our sales is going to the smartphone and tablet.

Szeho Ng – BNP

Oh, okay. All right. And in regards to your guidance for Q2, you’ve grown 19% to 21% sequentially. Can you also comment about the monthly linearity?

En-Ling Feng

The monthly?

Szeho Ng – BNP

The monthly revenue count in [inaudible]?

En-Ling Feng

Okay. What we definitely see, April has been pretty good and we expect May, June should be sequentially growing as well. So, we expect the second quarter should be a pretty good quarter for us.

Szeho Ng – BNP

Okay. And last question from me, on the 40 nano, do you think you have to necessarily skilled to compete against other boundary competitors?

En-Ling Feng

Okay. Well, when you talk about skills, we know that we have to start from zero. So, yes, I do believe that eventually we’ll have enough skills. And I think we already are seeing a very successful progress in our (entity) fee reduction and our customer is having strong confidence in our technology.

So, I believe this ramp will be smooth and strong.

Gary Tseng

Well, if I can comment in the last year [inaudible] as well. We can work with our customer. And it obviously our customer giving an indication and they definitely would like to work with us as their second source.

So, with this in mind, you want to look at 65 nano. Right now, we have somewhere around 25. Later on, we will have 25,000 wafer capacity. I expect in the 40 nano and in the future technology, we will be able to work with our customer and to maintain a reasonable market share.

So, we are happy with that.

Szeho Ng – BNP

Okay. All right. Thank you very much.

Operator

Your next question comes from the line of Eric Chen from Daiwa Security. Please ask your question.

Eric Chen – Daiwa Security

It’s very clear that it’s an interesting year in your China client. Can you elaborate more in terms of our revenue percentage and how much percent on the China client? And what kind of part are they working on? That’s my first question. Thank you.

En-Ling Feng

I think percentage of our China customers is around one-third. So, right now, exactly 32.5% this quarter.

And so, we are seeing customers focusing in the baseband communication as well as application processors area. We also have customers that’s very strong in the memory area, non-memory area.

Eric Chen – Daiwa Security

Okay. How much percent? I mean, the China client base, how much percent for the memory and how much percent for the general idea, the communication, like the handset, the smartphone baseband, that kind of thing?

En-Ling Feng

At this moment, I do not have the figure. I cannot tell you at this moment.

Eric Chen – Daiwa Security

Okay. And for your China client and the folks on the smartphone, and I assume that they are using your 55 millimeter process to cast that way. Like you said, the majority of the mainstream, the geometry, for your [inaudible] on the smartphone part.

Probably, it looks out the exposure at 55 – I’m sorry, yes, 55 millimeter process instead of the 45 millimeter process. Is that true?

En-Ling Feng

The customers are working on both 65/55 as well as the 48, 45, 40 nano.

Eric Chen – Daiwa Security

Okay, 30, 45 small product [inaudible] and a 55 for the smartphone wise. Okay. Can I say it that way?

En-Ling Feng

That is not necessarily true. I would not get into that particular detail.

Eric Chen – Daiwa Security

I see. Okay. Thank you. And by the way, and base on your CapEx wise, could you update in again how much percent for the 45 millimeter process? And also, for the 28 millimeter process, how much you are going to look at? Probably not only for this year and also for next year.

And by the way, the one answer on the [inaudible], would you mind – I’m sorry I missed the answer that you provided to the earlier question.

Thank you.

En-Ling Feng

Eric, for our CapEx this year the majority of this year’s CapEx will be for our 12-inch fab Shanghai ramp-up which is mainly in the 40 and 45 nano.

At this point of time, it is still a bit earlier for us to comment on our 28. But I believe next year shall be a good year for us to start spending money on this part.

As T.Y. just mentioned earlier, our 28 [inaudible] will be again last.

Eric Chen – Daiwa Security

Yes.

Tzu-Yin Chiu

Okay. So let me gather a few more points. I think you asked what is probably the revenue for the 45. By the end of this year, we believe we will get into high single digit as percentage of the revenue.

As far as the 28 nano, the high [inaudible] will be last. We also have poly/SiON technology.

Eric Chen – Daiwa Security

Okay, very clear. Thank you very much.

Operator

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

Rick Hsu – J.P. Morgan

Yes. Hi, good morning and congratulations again on your very strong patent for the second quarter. Just some follow up Erick’s previous question about your – you mentioned your China-based customers.

But would you mind sharing with us your view in the second quarter how much growth did you guys anticipate from the China-based customer internal revenue. This can be above your corporate average and for how much?

Tzu-Yin Chiu

We are targeting that China growth around 11%. Did that answer your question?

Rick Hsu – J.P. Morgan

Okay. Yes, sure. So [inaudible] percent growth in the second quarter quote/unquote, right?

En-Ling Feng

Right.

Rick Hsu – J.P. Morgan

So it’s actually below the corporate average. So in this case, can I assume you got a much better growth from non-China customers, mainly your overseas or many Taiwan customers?

So in that case are you guys gaining monthly share against your competitors?

Tzu-Yin Chiu

We believe – gaining market share in China, you mean?

Rick Hsu – J.P. Morgan

No, over the whole world. For example you [inaudible] just got a – they got a monthly [inaudible] quote/unquote in the second quarter internal revenue. But certainly you process much stronger and not to mention you are growing on capability high base in Q1.

So can I assume you are gaining monthly share in this global foundry industry?

En-Ling Feng

Great. Let me answer a part of that and then T.Y. can then comment there on. Well, I believe currently the whole semiconductor market role is strongly probably many in the very advanced technology now which mainly is 28 and therefore we are not [inaudible] yet.

However in 65, we saw a very strong customer demand from there. I believe we begin some small market share gain from here. In the legacy technology level we have much computerized our idle capacity previously. So we our see our strong demand from customer on [inaudible] technology. So we also create that part.

We probably would begin a small market share gain next [inaudible]. The after part that we have to do is involve in the domestic technology partner and we’ll become close to do it.

So all in all I believe in the technology we are competing with, we begin market share that’s why we believe we will grow 20% loss in the second quarter.

On the China front, while 11% gross quarter over quarter seems behind our overall 20% growth. But I believe moving into the third quarter and fourth quarter on China customer, should be moving that ideal base longer. And some part which is also being heard by the capacity booking either earlier for some quarter of [inaudible].

So this will not be trained let me put it this way. This ends the part of the question.

Rick Hsu – J.P. Morgan

Okay, yes. Thank you so much. That’s very clear, thank you. Yes, I have no question. Thank you.

Operator

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

Steven Pelayo – HSBC

Yes, just a couple quick follow ups. You spoke a lot about CIS and e-square and meta boxes. I’m just curious, can you give us – can you give a general idea how much those represent of your revenue? What’s the second quarter going to do, what’s 400 million of the top line? What would CIS be of the percentage of revenues? What would power management be of the percentage?

I’m just trying to understand some of the individual segments. Can you give us a general idea?

Gary Tseng

Well, actually we are not disclosing the market segmentation percentage in such a detail. But most of them, right now, they are still under a price of great development in our spectrum. So we believe this will be able to grow in the quick space – quick pace than the rest of the other area.

Steven Pelayo – HSBC

Okay. A longer term question then, [inaudible] has spent now for the last three years 40% to 50% of revenues on CapEx. This has now resulted in depreciation cost, increasing 20% or more last year and this year.

You guys are spending kind of 30% of revenues on CapEx that makes flattish depreciation. But I’m wondering if this is something that is a suggestion of what maybe happening to you, you know, a year or two down the road.

So can you put on a little bit of your longer thinking cap and then talk to me a little bit about where you think cap loan intensity will go and what might mean for your CapEx plan and depreciation cost going into 2013 and ‘14 as you look to ramp more 40 and 28 nanometer.

Gary Tseng

Well, thanks Steve. Let me comment first on nano and then T.Y. can add some more. In the last 12 months, actually we have a lot of things changed inside SMIC. And this comes from the management and also from the [inaudible] development. And this cost us a lot of step adjustment.

And the least is the reason why we CEO, we are spending less because we believe we should develop our technology, be more competitiveness, and also we have been able to best use our idle capacity and to bring up our utilization.

I believe towards the end of the second quarter, those adjustments as it become to an end, we are considering trying to pace up our spending into the future, but this is not coming from this year and we will consider it. But we will be very carefully work with our customer to see whether we need to pace up our CapEx. So we will bring up the percentage of our revenue into the CapEx.

So in the long-term perspective I believe we are starting to increase our CapEx or capacity in order to [inaudible] our customer.

Tzu-Yin Chiu

Okay. Yes, Steve, let me add that indeed during these past few quarters, we want to make sure our utilization improves. Every bit of the patent, the [inaudible] have to get into better productivity.

And so we continue to be in this level to make sure that every bit of the investment we are making and we will be making in the next few quarters get fully utilized. Now if the customer demand increases and the customer feels satisfied with our services and ask for more capacity, certainly if we have the ability such as the case if we turn around and be profitable, then we would definitely consider increasing the capacity, the capital investment.

Steven Pelayo – HSBC

Then I guess there should be another way.

En-Ling Feng

Does that answer your question?

Steven Pelayo – HSBC

Yes, it does partly. But I’m trying to quantify it a little bit and from a standpoint of you are talking about having 10,000 wafers of 40 nanometer capacity by the end of this year. And that cost whatever x amount.

If we say a year out from today, maybe you want to have 10,000 wafers 28 nanometer capacity exiting next year, the incremental cost of doing that is going to be, I think, it’s significantly higher CapEx number than what you’re currently spending this year.

So I’m trying to understand how meaningful I should be thinking about CapEx planned out in 2013 and 2014. Are we going to have to get back to spending over a billion dollars a year? Or is there any way for me to try to think about that?

Tzu-Yin Chiu

Steven, I think this is a little bit too early to comment at this point of time and we will probably be in a better position to inform you later as we get our 20 nanometer ready.

Steven Pelayo – HSBC

Okay, great. Thank you.

Operator

This is the end of the Q&A session. I would like to hand the call back to our CEO, Dr. Chiu for closing remarks.

Tzu-Yin Chiu

In closing, I would like to take this opportunity to, again, thank all of our shareholders, customers, employees and suppliers for their trust and their support.

I also thank the analysts who participated today for their questions and comments. And see you again next time.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.

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