Semiconductor Manufacturing International Corporation (SMI) CEO Haijun Zhao on Q3 2018 Results - Earnings Call Transcript

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About: Semiconductor Manufacturing International Corporation (SMI)
by: SA Transcripts

Semiconductor Manufacturing International Corporation (NYSE:SMI) Q3 2018 Earnings Conference Call November 7, 2018 7:30 PM ET

Executives

Tim Kuo - Director, IR

Yonggang Gao - CFO

Haijun Zhao - Co-CEO

Liang Mong Song - Co-CEO

Analysts

Randy Abrams - Credit Suisse

Charlie Chan - Morgan Stanley

Rick Hsu - Daiwa Securities

Operator

Welcome to the Semiconductor Manufacturing International Corporation's Third Quarter 2018 Webcast Conference Call. Today's conference call is hosted by Dr. Zhao Haijun, Co-Chief Executive Officer; Dr. Liang Mong Song, Co-Chief Executive Officer; Dr. Gao Yonggang, Chief Financial Officer; and Mr. Tim Kuo, Director of Investor Relations.

Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's website. Please be advised that you are dial-ins are in listen-only mode. However, at the conclusion of the management presentation, we will be having a question-and-answer session. At which time, you will be 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.

Without further do, I would like to introduce to you, Mr. Tim Kuo, Director of Investor Relations, for the cautionary statement. Thank you, please go ahead.

Tim Kuo

Good morning and good evening. Welcome to SMIC's third quarter 2018 earnings webcast conference call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter. And then our Co-CEOs, Dr. Zhao and Dr. Liang, will provide some business 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 financial presentation are available for you to download at www.smics.com under Investor Relations in the IR Calendar section.

Let me also remind you that the presentation we'll be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the U.S. Securities and Exchange Commission, and the Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 27, 2018.

During the call, we will make reference to financial measures that do not confirm to Generally Accepted Accounting Principles, GAAP. These measures may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non-GAAP numbers we will be discussing. Please note, that all currency figures are in U.S. dollars, unless otherwise stated.

I'll now hand the call to our CFO, Dr. Gao for financial highlights.

Yonggang Gao

Thank you, Tim. Greetings to all our listeners. First, I will highlight our third quarter results and then give fourth quarter guidance. In third quarter 2018, our revenue was $851 million, a decrease of 4.5% quarter-over-quarter. Excluding the technology licensing revenue, revenue grew modestly quarter-over-quarter, mainly due to an increase in wafer shipments in the third quarter.

Gross margin was 20.5% compared to 19.7% gross margin excluding the technology license revenue in the second quarter, mainly due to the better utilization rates in the third quarter. Non-GAAP operating expenses were $228 million. Profits for period attributable to SMIC was $27 million, while non-controlling interest was $19 million of credit to SMIC's attributable profit.

Moving to the balance sheet. At the end of third quarter, cash-on-hand, including financial assets, were close to $3 billion, gross debt to equity ratio was 42%, and net debt to equity ratio was 5%. In terms of cash flow, we generated $260 million of cash from operating activities in the third quarter. Now look ahead into the fourth quarter of 2018. Our revenue is guided to be down 7% to 9% quarter-over-quarter, mainly due to low seasonality.

Gross margin is expected to range from 15% to 7%, mainly due to lower utilization rates which is expected to be middle 80s. Non-GAAP operating expenses are expected to range from $226 million to $230 million. Non-controlling interest of our majority-owned subsidiaries are expected to range from positive $20 million to positive $22 million, which are losses to be borne by non-controlling interests.

The planned 2018 CapEx for foundry operations decreases from approximately $2.3 billion to approximately $2 billion, of which approximately $1.2 billion is expected to be a spend in our capacity and approximately $0.3 billion is mainly excited [ph] to be used for R&D equipment. The decrease in CapEx is mainly due to the equipment moving schedule, schedule delay and productivity improvement. The planned 2018 CapEx for non-foundry operations are approximately $110 million, mainly for the construction of employees' living quarters. Our planned 2018 D&A is approximately $1.06 billion. Our 2018 gross margin is expected to be in low 20s. If excluding the technology license revenue, our 2018 gross margin is expected to be high-teens.

I will now hand the call over to our Co-CEO, Haijun for our general remarks.

Haijun Zhao

Thank you, Yonggang. Thank you all for joining us on today's call. This morning I'll share with you the result of third quarter. Some highlights of our differentiated platforms, and our outlook for the remainder of this year.

Overall, things are tracking in line with our original expectations but we remind cultures on the near-term. The lackluster end-markets and global tension continue to keep industry growth muted. However, the devaluement [ph] and the adoption of new technologies with China keep us optimistic about the long-term. Internally, during our period of preparation to transition, we also continued to work on developing our technology and the platforms to allow ourselves with the increasing trend in the China markets. Our third quarter results were in line with our original guidance.

In the third quarter, our total revenue decreased 4.5% quarter-over-quarter but increased 10.5% year-over-year. The decrease was a result of one-time technology license revenue actualized in the second quarter. When excluding revenue from this technology licensing, our revenue increased slight Q-over-Q. We were in line with our third quarter gross margin guidance at 20.5%, a slight sequential increase.

Now to address our markets and the platforms. In third quarter our core base net revenue from the China region hit record high which grow 40% year-over-year and 5% sequentially. We continue to see China represent the largest IC market and as they prefer the foundry, we position ourselves and aim to capture the opportunities by working closely with our customers. China is not only the largest IC market but also is proactively developing and adopting new technologies in it's cities from several of special intelligence to smart city and autonomous transportation. We believe in the long-term this will prove beneficial to participants in the China IC supply chain, and especially to SMIC.

As we continue to enhance our competitiveness to [indiscernible] our customers to raise the opportunity. We also need to focus on our fundamentals while expanding and enhancing our more mature and advance notes platforms. For example; we have expanded our fingerprints sensor portfolio as we have begun under-class solution production and the shipments. Although it was a generous solved output, we still benefited from Power IC, wireless connectivity, and the fingerprints related to devices. Consumer related base net including setabouts and a home plan also had some progress in revenue. Our power management base net platform continued to be one of our key revenue drivers for this year, and we continue to see strong demands from this area for the coming year.

Our revenue from power, wireless connectivity and a fingerprint sensors grew 30% year-over-year and a 5% sequentially in third quarter. As we are reaching towards the end of 2018 we maintain our revenue targets of high single-digit percentage growth. Our core base gross margin targeted in the high teens percentage, and a positive net profitability attributable to shareholders. We do seen a decline in revenue from mid-to-high single-digits percentage for the coming quarter due to seasonality, market uncertainty and the softer demand as while as the continued weakness in the smartphone sector. The growing retention and the weakening of currencies also are causing uncertainties and the limitations in the overall economic environment.

In closing my remarks will reiterate our annual targets and the cultures I'll look in the near-term due to the global uncertainties but we remain optimistic in the long-term given our unique position in the China market. We are uniformity to capture in the progression of SMIC's strategy for positive growth and the long-term value creation to benefit our customers, to our shareholders and the employees. So we thank you for the continued the support.

I will now turn the call over to our Co-CEO, Mong Song, for further comments.

Liang Mong Song

Thank you, Haijun and good morning, everyone. Thank you for joining us today. I would like to take this opportunity to share our current progress on R&D and business development.

We completed our 28-nanometer HKC+ development and we now have several projects kicking off for our 28-nanometer platform. At the same time, we are on-track with building up our 28-nanometer IP portfolio to serve a diverse range of customers. Meanwhile, our 28-nanometer [indiscernible] is becoming increasingly competitive as we enhance it's performance and expand our portfolio and derivatives.

On the FinFET side, I'm happy to say that we are also on-track with our FinFET technology. As we are walking towards risk production in the second half of next year. As mentioned in my last earnings call, our first version of FinFET technology was ready for business engagement. We quantify our process and delivered our first FinFET process design kit to our customers. We are in an ongoing process of IP validation with our customers to verify the prototype functionality, while we tend to engage more business opportunities.

Our FinFET may attrition [ph] mobile and wireless customers migrating from 28-nanomter streaming on 4G LTE and in the future, 5G in China. In addition to mobile applications, FinFET is surely to address emerging applications such as AI, IoT and automotive industry sectors as we plan to expand our 14-nanometer portfolios to cover these areas. We have seen quite a lot of changes in industry dynamics in the past few quarters, and increasing opportunities in FinFET technology. We are accelerating our R&D giving us the chance to seize opportunities to conclude my remark to date we are executing on poly technology roadmap and we will continue to execute our strategies cautiously via concentrating on more focused R&D efforts seeking profits in our operations targeting precise market opportunities and producing reliable quality products.

Post strategies to build up competitiveness in our key technology workplace work closely with our customers to increase share and to build up our ability to create long-term value for our stakeholders.

We thank you for your continued ongoing support and for joining us today. I will now hand the call back to Tim for the Q&A session of this call.

Tim Kuo

Thank you, Dr. Liang. Today's Q&A will be hosted by Dr. Gao and Dr. Liang and our CFO, Dr. Gao, 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] And our first question comes from the line of Randy Abrams from Credit Suisse.

Randy Abrams

My first question about the applications for third quarter; there was lower mix from consumer and also 55-nanometer, 65-nanometer. Could you talk about the slowdown in those areas in third quarter? And looking to fourth quarter in your guidance, is it broad across application, the slowdown, or are certain applications pulling back more and some holding up better?

Haijun Zhao

Basically we should that if I can counter this year for the communication sectors and home plans are running very high and we really [indiscernible] the corrections maligned for eventually these kind of thing and the amount got slowed down. And for the fourth quarter, that's the traditional, seasonal quarter you know for the communications and other consumers products. And we do now see a specific type of sector to go for extreme and this is the general case, they try to guide there to move down. For example, we have both of the communication sector connectivity and consumers, and also including related memories of CIIs and power devices. They move to the similar downtrends and we really see the correction on inventory, and just now I mentioned that also certain part of the uncertainty saw the customer now become more conservative.

Randy Abrams

And then one follow-up to the first and then I'll ask a second question. Just looking ahead to 2019, if you see certain areas you're focused on, if you were to outgrow -- if you see areas to outgrow the industry whether recovering 28 or filling in the 12-inch or games on 8-inch? And the second question I had was on the sale and leaseback for 306.8 [ph]. If you could walk through the -- how that works in terms you'll receive cash and then instead of depreciation you may have -- like more of an operating expense, and then if you plan to take advantage or use that leasing program more. So maybe, if you can talk through how the leasing program would work and how much you may use that?

Haijun Zhao

I'll answer the question first and then go for the detailed number financial for leasing. I'll give the call to our Dr.Gao, CFO, to give you more input on that. And for the 2009, we believe that from second quarter and the market will start to recover after two quarters type of a correction on the inventory, and settle down the uncertainties. We understand at a previous conference call I also shared with you and the other listeners that we have [indiscernible] for the seasonality of the market by building up additional platforms for our 12-inch. Previously I mentioned about six or seven new product lines like the development and expansion of the PM use, CMO, C-major sensors and non-flash, never-flash [ph] high drivers; and for 12-inch these kind of product platforms are brand new. So layout the incremental revenue add-on to our 12-inch wafer fabs. And those are gross points of our nice year together with the market recovery for the existing platforms and customers.

And for the operation -- operating expense and cash on leasing, I believe we will continue to density of our goods [ph] too to support as we go together with expansion, but for the detailed strategy, I'd give it Dr. Gao.

Yonggang Gao

[Foreign Language]

Tim Kuo

Let me help you translate, this is Tim. So over the past two years, we try to utilize the operational leasing strategy, so end up in the end of third quarter this year. We have done $1.2 billion.

Yonggang Gao

[Foreign Language]

Tim Kuo

So in this coming quarter, we will use this strategy to expend another $300 million on operational leasing.

Yonggang Gao

[Foreign Language]

Tim Kuo

So according to this operational leasing, approximately $20 million of depreciation will be saved. And this is the answer to your question.

Randy Abrams

Just one quick follow-up; the $1.2 leasing, is that on top of the CapEx implying your equipment and investment is on top of the $2 billion or if you could explain that?

Haijun Zhao

It is included.

Operator

And our next question comes from the line of [indiscernible].

Unidentified Analyst

My first question is on the utilization rate you're looking into fourth quarter, separately in the 8-inch and 12-inch?

Haijun Zhao

Could you say your question again?

Liang Mong Song

I got your question. You asked about the nominal utilization in the 80's. And for the first quarter, yes, we see -- that's in addition across 8-inch and the 12-inch. Basically, we should say that we are very strong on 8-inch due to rotation, we feel confident on that. And the lower [indiscernible] 12-inch.

Unidentified Analyst

So you are seeing into fourth quarter the 8-inch UTR would still stay pretty high but the softness will be mainly come from 12-inch. Am I right?

Liang Mong Song

Yes.

Unidentified Analyst

In terms of the 12-inch softness, is there any particular application or particular process knows that are seeing weaker than the others?

Liang Mong Song

I just know -- when I answer the question, Randy mentioned that we see the seasonality across sectors. But the consumer part like a blue-chip [ph] type set above and guiding more heat in the fourth quarter.

Unidentified Analyst

And my second part is on the inventory correction; Thomas [ph], the CEO you just mentioned, but it seems like your another foundry peers in Taiwan CSMCB [ph], I mean a month ago they were -- it seems like they were not sure about this and they actually say that six excessive inventory situation at the end of this year will be less of your -- the end of last year but it seems like the COU [ph] sounds more pessimistic or conservative compared to your peers. Can you elaborate more on that and then what's the difference or maybe you see more weakness inventory correction coming from your Chinese customers or your foreign customers?

Haijun Zhao

I don't not comment on our peers but for SMIC part -- I really communicate very careful, thoroughly our customers, I really found that for the fourth quarter they are doing correction on the inventory [indiscernible] the second quarter for the -- they have everything for SMIC, it's way too strong and at that moment, they could care for many things and now they like to stabilize the inventory. We really see the correction in the fourth quarter and I believe this kind of correction and the seasonality is tend to the first quarter, and the recovery will Malay [ph] in the second quarter.

Unidentified Analyst

I think the last quarter, you mentioned about the next-technology development beyond 40-nanometers; I was just wondering maybe you haven't decided a name of the note but I just wonder in terms of the timeline; do you have a more specific timeline of technology note?

Haijun Zhao

No, we already kick-off that project and the program is ongoing, on-track. But it's too early to announce this kind of timelines.

Operator

And our next question comes from the line of Charlie Chan from Morgan Stanley.

Charlie Chan

First of all, I wanted to talk about the total managed overcapacity issue as I sound, your industry peers have mentioned that there should be some overcapacity in 28-nanometer, 40-nanometer and then it's not going to resolve anytime soon, maybe it take several years. So my question is that does that affect your commitment to the future CapEx because I remember the company promised that in the coming two years you want to keep the CapEx at the same level. So this is my first question.

Haijun Zhao

For 12-inch, especially for 28-nanometer, and for the overcapacity situation in the industry is well-known to everybody. And SMIC has buildout this 28-nanometer technology together with 40-nanometer technology with main road [ph] pace. So overall, we should say SMIC has not overbilled too much. When Yonggang told the available capacity in 28-nanometer, SMIC and just take a very small fraction of this kind of over built. So at this moment we still manage the 28-nanometer capacity while in the meantime, we use the other platforms to share the capacity and previously I mentioned that SMIC is running a 24-nanometer standalone [indiscernible], and we are also running 40-nanometer other platforms and let's sure the capacity.

So for SMIC, yes, in the fourth quarter this year because of the seasonality and the crisis on inventory, we see the lower utilization in the third quarter and second quarter, but overall, I mean the utilization for 12-inch density cross-ball [ph], not specifically against for 28-nanometer.

Charlie Chan

It seems like your CapEx investment is basically for 40-nanometer could continue, am I right on this follow-up prepared comment?

Haijun Zhao

You mean 14 -- is that a 40, right?

Charlie Chan

Yes, 14-nanometer investment and I would assume your CapEx to be flatt-ish in coming two years, is that a correct interpretation?

Haijun Zhao

Yes, 14-nanometer CapEx for building up the initial stage of production for 14 seems right. It's facing to the CapEx for [indiscernible].

Charlie Chan

And my next question is your profitability; unfortunately the company posted operational loss last quarter, so with this kind of semi-down cycle and tough industry competition, I mean those are telling that capacity. So when would the company expect operational level can turn profitable again? And also how if coming going to manage your free cash flow; meaning, you want to spend the 10-level of CapEx but at the same time you can site operational cash flow continue to be a smaller than the CapEx. So, that's coming, need more funding or risk more attached in the coming years.

Haijun Zhao

Charlie, actually you reached quite a many points they, just very good, thank you. And overall, we should say this way. SMIC has announced our plan to build up on both sides, on the right hand side of base, [indiscernible] our manufacturing capability and to increase the profitability on the other side -- we continue to do the advance technology development and to start a production of a 40 steam files. Nice year and we try to our best to pilot both. At this moment, our cash situation; it's very good. So for the most days, we will try to do the main road pace on both sides to get the balance.

Operator

And our next question comes from the line of [indiscernible].

Unidentified Analyst

I have two questions;, the first one regarding the recent share buyback. Are there any conditions you can share with us that would trigger more buyback going forward?

Yonggang Gao

[Foreign Language]

Tim Kuo

So actually we have done share buyback on September 27, as well as the October 4, 2018; actually we have announced that.

Yonggang Gao

[Foreign Language]

Tim Kuo

Actually we are overseeing our stock movement, as well as the capital market. So any extended share buyback is still protected.

Unidentified Analyst

Second question on the minority interest guidance. This year you guide the minority interest for Q4, only slightly up from the Q3 levels. For the last two years in 2016 and 2017, and as I discussed, Q4 minority interest number will be significantly high than the previous [indiscernible].

Yonggang Gao

[Foreign Language]

Tim Kuo

Actually we are leveraging the JV model in all of our advance technology business.

Yonggang Gao

[Foreign Language]

Tim Kuo

So actually we will announce the NCI number every quarter, even they are a subject to change depending on the actual results.

Yonggang Gao

[Foreign Language]

Tim Kuo

So for upcoming SMIC South and SMIC North, the minority shareholders will continue to share the R&D expenses, as well as the new projects. That's the answer to your question.

Unidentified Analyst

Actually -- so that means that going forward the market interest is not going to be very lumpy in Q4, so it happens then and now for every quarter?

Tim Kuo

Could you say your question again?

Unidentified Analyst

So the minority interest is going to be evenly spread out, is that very lumpy in Q4 every year like in 2016 and 2017?

Yonggang Gao

[Foreign Language]

Tim Kuo

So actually for different expenses we have a different rules for listing; for example, like R&D or other -- like royalties, we will according -- we will lift these expenses in accordance with the actual results.

Operator

And our next question comes from the line of Chris Yam [ph].

Unidentified Analyst

My first question is on the FinFET first version, risk reduction in second half '19. Can you discuss the number of tape [ph] now you expect next year? And also, what type of customers are using your technology -- are they system customers or are they fab-less customers? Thank you.

Haijun Zhao

Just like we already communicated through last quarter and this quarter, our FinFET and technology platform now it's ready for customer engagements and we do have customers working with us to the first product and the second. And the first part is the launching part and the first application will be consumer, media type, as well as mid-to-low end mobile applications. And the portfolio to sell more sectors like IoT, automotive parts, later.

Unidentified Analyst

My follow-up is on the 28-ish HKC+; can you -- would you able to discuss the 28-nanometer outlook for next year and weather -- and how big of the contribution you expect to see from the HKC+ platform?

Haijun Zhao

You know, currently our available capacity for high command C-version has been running through the industrial performance and the loading is pretty well. And which way this kind of C-version loading to your customers' demands and the products to C+ from early nice year. And the application is more like -- to the similar sectors, and just upgraded from C-version to a C+ version. From the company's state, just now we mentioned that we do not have that much overviewed capacity because we view the 28-nanometer capacity and the [indiscernible] to the customer demands with the manner and pace, the inside of planned deal and later looking for customers. So decision each end is still Okay for 28-nanometer utilization spot as may I say.

Unidentified Analyst

My last question is on your differentiated technology, you mentioned quite a few of them. I also see in your presentation and under your capacity by different fabs, that you've raised your 200-millimeter fab capacity from 35,000 the 40,000 in the third quarter. And that it seems like it's from asset [ph]; so I was wondering if you guys will start [indiscernible], what's the strategy on a discrete side? Thank you.

Haijun Zhao

Yes, that's true. We increased 5,000 wafer capacity to do most of that, that's a decreased [ph] device. And on top of the existing capacity [indiscernible], it's a part of our 8-inch capacitor from previous comments I would have made, and the 8-inch demands and the utilization of SMIC is still where you got.

Unidentified Analyst

This is something new, right. The mass set is something that you guys haven't making your fabs before, this is a new product. Is that correct?

Haijun Zhao

We should say that many years back when I see a free capacity, we did make very small amount of -- for most part again, our tanging [ph] fab; so we do have the customer base and the baseline, and now we have more customer approach SMIC to do these kind of products, you know the market situation. So SMIC has also provide this type of service. We do not have any private space in Shenzhen, Shanghai or other place; the only available clean room is [indiscernible], that's why we set up the capacity there.

Operator

And next question comes from the line of [indiscernible].

Unidentified Analyst

[Foreign Language]

Tim Kuo

You're asking about whether there is going to be more capital injection from the minority shareholders? I'll let Dr.Gao answer this question.

Yonggang Gao

[Foreign Language]

Tim Kuo

So as far as this advanced technology business moving on at SMIC, as you can see it's actually done by the JV model, the joint venture model; so the shareholders will see different projects to inject their capital. So the first half of this year around $600 million has been injected and we targeted the end of this year to have another $960 million. So for the external shareholders for 2018, the minority shareholders will inject $15 billion as total.

Unidentified Analyst

[Foreign Language]

Tim Kuo

So you're asking about the NOR-NAND [ph] flash status; especially you have seen the revenue contribution from 55-65 nanometer is decreasing in the past quarters, so you are wondering whether there is going to be some capacity issues or some ASP pressures. I like Dr. Zhao answer this question.

Haijun Zhao

For this minority sector, SMIC is doing specialty memory service to our existing customers and overall we should say that the production is maintaining the same and because customer demands are there, by the way it really see the pricing pressures and we have new competitors get into the 20-24 something technology range in the NAND [ph]. And for the NOR-flash [ph] we also have the other competitors scratching into the similar markets, and overall, we should say the specialty [indiscernible] the abdications that follow the trend of the overall industry, when we have the seasonality, the demands for memory have the similar change, the tighter guide we've set up out mobile funding kind of things and our expectations still that we'll have the similar trends go further down and we feel the pricing pressure similarly in the markets.

Operator

And our next question comes from the line of Peter Chen [ph] from CIMB.

Unidentified Analyst

Can you hear me?

Operator

[Operator Instructions]

Tim Kuo

There is some unexpected issue, sorry about that.

Operator

So we'll be proceeding to your question, comes from the line of Rick Hsu from Daiwa Securities.

Rick Hsu

I guess my first question is on [indiscernible] the specialty for HKC but pro-CSR HKC+; so could you give us some more color about your revenue contribution because I remember the 28-nanometer revenue ramp up quite nicely in 2017 and hit the double-digit rate in Q4 2017. And now it's soft, so right now it's still staying around the single digit, so I'm just wondering when do you guys expect the 28-nanometer ramp up the double-digit contribution again sometime now [ph]?

Haijun Zhao

The thing for 28-nanometer would have been cheap commonly on this topic through the quarters. And we should say this way, the first 28-nanometer ramp up and in 20 city and the 17 would ramp up upto 10% -- over 10% revenue [indiscernible] with the 28-nanometer PolySiON technology and in the mobile phone sector. Later, when we have the hike [indiscernible] with mobile phone 20 PolySiON to High-K Metal Gate C type of version and that's for consumer and type of products. And now we continue to ramp certain part of 20 capacity in mobile sector for 20 PolySiON products. In the meantime, we also run 20 HKC type of products. Now we're into -- reintroduce to see part technology platform.

First things first, we're converting certain part of C-version same products into C+. So we do not [indiscernible] running in volume for the 28-sector. More like they maintain the similar volume to run that because we have the existing customers in the mobile station, we are also have the 20 C customers in the consumer sector and we [indiscernible] to upgrade it. We are building up 28 High Gate C+ IP while they take time to gather additional productions. So hopefully, in the second half of nice year, we start to have additional loading from other customers to do this as a sub-C+ lending up.

But for the overall capacity buildup with 28-nanometer, just now we already mentioned that. In the world overall industry, they are over-supplied. So we do not have a greater plan to expand the capacity to add-on to 28-nanometer production. More like we maintain the similar volume dedicated to 20 PolySiON and High-K Metal Gate. So we do now expect the percentage getting higher in the overall revenue portion.

Rick Hsu

And the second question is, how much government subsidy did you guys expect to receive in Q4 this year?

Haijun Zhao

This I will give it to our CFO, Dr.Gao.

Yonggang Gao

[Foreign Language]

Tim Kuo

Let me translate for you. So every year we are receiving the government R&D grant and you can see, because we put more emphasis on the advanced technology; so the grant amount is increasing. So we estimate in the fourth quarter this government grant on R&D would be approximately $50 million.

Rick Hsu

And the last question is, could you run through your 2018 CapEx update again because I missed this part in the very beginning?

Tim Kuo

Rick, could you say it again?

Rick Hsu

Could you run through your CapEx updates for 2018 because I think Yonggang mentioned about this numbers update in the early part of this meeting but I missed it. So could you run through the update again about this year's CapEx?

Yonggang Gao

[Foreign Language]

Tim Kuo

So the CapEx for this year has decreased from originally $2.3 billion to around $2 billion.

Operator

Thank you so much. I would now like to hand the call back to IR Director, Tim Kuo for closing remarks.

Tim Kuo

Before my closing remarks, I will hand the call to our Co-CEO, Dr.Liang for some further statement.

Liang Mong Song

Thank you. Let me reiterate about our first-generation FinFET technology with protection date. We would steer on-track with original print on which production will be in the first half of next year.

Tim Kuo

Okay, thank you, Dr.Liang. In closing, we would like to thank you everyone who participated in today's call, and again, thank all of you for your trust and support. Thank you very much.

Operator

This is the end of SMIC third quarter earnings conference call. We thank you for joining us today.