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Edited Transcript of 981.HK earnings conference call or presentation 14-Feb-20 12:30am GMT

Q4 2019 Semiconductor Manufacturing International Corp Earnings Call

Shanghai Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Semiconductor Manufacturing International Corp earnings conference call or presentation Friday, February 14, 2020 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gao Yonggang

Semiconductor Manufacturing International Corporation - CFO, Executive VP, Joint Company Secretary & Executive Director

* Haijun Zhao

Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director

* Mong Song Liang

Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director

* Tim Kuo

Semiconductor Manufacturing International Corporation - IR Director

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Conference Call Participants

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* JunJie Chen

Tianfeng Securities Brokerage Co., Ltd., Research Division - Research Analyst

* Leping Huang

China International Capital Corporation Limited, Research Division - Analyst

* Randy Abrams

Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

* Szeho Ng

China Renaissance Securities (US) Inc., Research Division - MD

* William Lu

UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst

* Yiqun Chan

CIMB Research - Research Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Semiconductor Manufacturing International Corporation's Fourth Quarter 2019 Webcast Conference Call. Today's conference call is hosted by Dr. Zhao Haijun, Co Executive Officer (sic) [Co-Chief Executive Officer]; Dr. Liang Mong Song and Co-Chief Executive Officer; Dr. Gao Yonggang, Chief Financial Officer; and Mr. Tim Kuo, Director of Investor Relations. Today's conference call will be simultaneously streamed through the Internet at SMIC's website. (Operator Instructions).

The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately 1 hour after the event.

Without further ado, I would now like to introduce to you, Mr. Tim Kuo, the Director of Investor Relations for the cautionary statement. Please go ahead.

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [2]

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Good morning, and good evening. Welcome to SMIC's Fourth Quarter 2019 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-CEO, Dr. Zhao, will provide some business commentary. This will be followed by our Q&A session hosted by Dr. Zhao, Dr. Liang and Dr. Gao. 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 Hong Kong Stock Exchange Limited.

During the call, we will make reference to financial measures that do not conform to international financial reporting standards, IFRS. These measures may be calculated differently than similar non-IFRS data presented by other companies. Please refer to the tables in our press release for a reconciliation of IFRS to the non-IFRS numbers we will be discussing.

Please note that all currency figures are in U.S. dollars unless otherwise stated.

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

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Gao Yonggang, Semiconductor Manufacturing International Corporation - CFO, Executive VP, Joint Company Secretary & Executive Director [3]

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Okay. Thank you, Tim. First, I will highlight our 2019 full year unaudited results, which are based on the sum of our unaudited quarterly results for the year of 2019. And I will summarize our fourth quarter results and give the first quarter 2020 guidance.

Revenue in 2019 was $3.12 billion as compared to $3.36 billion in 2018, mainly due to our exit from LFoundry. If excluding onetime license revenue and impact from LFoundry exist, 2019 revenue increased slightly comparing to 2018.

Gross margin in 2019 was 21% compared to 20 -- 20% (sic) [22.2%] in 2018. If excluding onetime losses revenue and the impact from LFoundry exist, 2019 Gross margin was to 21.5% comparing to 19.1% in 2018.

Profit for the period attributable to SMIC in 2019 was $235 million comparing to $134 million in 2018. EBITDA reached a record high of $1.37 billion in 2018 -- 2019 comparing to $1.16 billion in 2018.

In the fourth quarter 2019, our revenue was $839 million, an increase of 2.8% quarter-over-quarter, mainly due to the increase in ship in wafer shipment. If excluding the revenue from LFoundry, our revenue increased 4.6% quarter-over-quarter.

Gross margin was 23.8%, sequentially increased, mainly due to the rights in utilization.

Non-IFRS operating expenses was $248 million, which was lower than the guided range, mainly due to the control of R&D expenses.

Profit for the period attributable to SMIC was $89 comparing to $27 million in the fourth quarter of 2018.

Noncontrolling interest was $13 million of credits to SMIC's attributable profit, lower than the guided range, mainly due to decreased loss in some majority-owned subsidiaries.

Moving to the balance sheet. At the end of the fourth quarter, cash on hand, including financial assets and excluding restricted cash was close to $4.6 billion.

Gross debt to equity was 39% and net debt to equity was negative 6%.

In terms of cash flow, we generated $345 million cash from operating activities in the fourth quarter.

Now looking ahead into the first quarter of 2020. Our revenue is guided to increase 0% to 2% quarter-over-quarter. Gross margin is expected to range from 21% to 23%, mainly due to the increased manufacturing costs during the period.

Now our IFRS operating expenses are expected to range from $294 million to $300 million. Noncontrolling interest of our majority-owned subsidiaries are expected to range from negative $17 million to $19 million, that's from SMIC's attributable profit, which are going to be borne by noncontrolling interest.

The planned 2020 CapEx for foundry operations is approximately $3.1 billion, which is mainly for the equipment and the facility in our majority-owned in Shanghai 12-inch fab. The planned 2020 CapEx for nonfoundry operations approximately $60 million, mainly for the construction of employees' living quarters.

Our planned 2020 D&A is approximately $1.4 billion. Our gross margin target is still maintained around 20%, and we target to maintain our EBIT margin for 2020 in the mid-40s percentage.

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

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [4]

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Thank you, Yonggang. Thank you all for joining us today. I will give the overall business commentary, then Mong Song, Yonggang, and I will answer questions from the line.

Looking back, 2019 was an eventful year as SMIC transitioned its strategies to align with the changing markets, and as we prepare for our next stage of growth. We believe that 2020 is the beginning of new phase for SMIC as our labor on technology development is now translating into production and revenue.

Going into 2020, we were excited to see positive momentum and strong orders. For many individuals though, the new year is shadowed by an unfolding health situation in Central China. [Ourselves] goes to those affected in Wuhan and elsewhere. SMIC has put together donations to support the health efforts in Hubei province. At the same time, the company has taken measures to safeguard the health and the safety of our employees as our fabs continue to run in full.

At present, SMIC cyber operations have not been affected and are running normally. We remain optimistic about the health growth based on the current customer feedbacks.

Meanwhile, the effects of the virus and its demands is still unfolding, and that we are still monitoring the situation closely.

Let me continue my remarks by highlighting the results of the full year 2019 and the fourth quarter of 2019, then I will update you on our mature nodes technology, advanced technology progress, capacity plans and a preliminary outlook for 2020.

Total revenue in 2020 was $3.12 billion compared to $3.36 billion in 2018. It's our -- as we focus on preparing the company's technology for coming growth and exited the operations in Italy, our original targets for 2019 full year gross margin was set to be mid-teens to 20%. The result of 21% was due to better product mix, utilization on a cost control. With a limited fab expansion in 2019, utilization's running high. Meanwhile, profit attributable to SMIC grew 75% year-over-year to $234.7 million in 2019 from USD 134.1 million in 2018 a year ago.

Our 2019 EBITDA reached a historical high of $1.4 billion, representing a 44% EBITDA margin. Also, as a result of improved utilizations mix and decreased the cost and expenses, our fourth quarter revenue and our gross margin [were beating] our guided expectations. Revenue increased 2.8% quarter-over-quarter and a 6.6% year-over-year compared to fourth quarter 2018, and when excluding revenue contribution from LFoundry in Italy, revenue was up 4.6% quarter-over-quarter and 13.8% year-over-year.

Reported gross margin was 23.8% in fourth quarter 2019 compared to 20.8% in third quarter last year, and 17% in fourth quarter 2018 a year ago as the capacity utilization climbed to 99%.

Overall, wafer shipments in the fourth quarter increased 2% quarter-over-quarter and 10% year-over-year. And our profit attributable to SMIC in the fourth quarter was USD 88.7 million compared to $26.5 million in fourth quarter a year ago as revenue grew more relative to cost.

From a regional perspective, business was particularly strong in the China region, which increased 11% quarter-over-quarter and 21% year-over-year, contributing to [35%] of our total revenue.

SMIC's role in China ecosystem is becoming increasingly important as we work hard to provide expanded technology, capacity and the solutions to address growing market demand. We are pleased to see growth from both existing and new customers. Meanwhile, we aim to serve an international market while having the natural advantage of being close to the largest IC market.

United States and Eurasia revenue contribution was down sequentially as we shifted some of our business in the sales of our European fab. However, revenue from our Eurasia customers is up 27% year-over-year.

Now to address our mature node technologies. I'm pleased to see that our past efforts on mature technology platforms have paid off as we see full utilizations in our mature fabs, firm pricing, quality improvement and a great track records. Our strategy on mature technology continues to be -- to provide best-in-class technologies for specific platforms to maintain healthy profit margins while adding values. I believe we have set a strong foundation with strategic customer partnership for long-term health.

In the recent quarters, we saw growth momentum in our CMOS image sensors, power-ICs, fingerprint, Bluetooth and a specialty memory platforms. Revenue from these device applications during the fourth quarter of 2019 are up 5% quarter-over-quarter and 11% year-over-year. And going forward, we see these platform partnerships with customers providing a stable groundwork for solid business during the year.

By technology nodes, a majority of our growth in both quarter came from 35 and 55 nodes. 65, 55 nodes is up 8% quarter-over-quarter and a 41% year-over-year. These increases are largely due to connectivity, application processors, flash memory and the CMOS image sensor for IoT and consumer-related applications.

Now move on to our advanced technologies which are becoming a vital part of SMIC's business strategy. Previously, SMIC has relied mainly on the mature nodes for incremental revenue growth. However, in this new phase, SMIC is focusing efforts and will begin to see an increasing amount of revenue growth coming from advanced nodes technology in the coming years.

We are pleased to see 14 nanometer has moved from development into production and has started contributing to our revenue, reaching 1% wafer sales, contributing in fourth quarter 2019. We have engaged a variety of customers on this node, and we will see a gradual ramp-up this year in both capacity and revenue.

The ramp-up of the new FinFET fab in Shanghai is starting up steadily and will likely pick up, particularly in the second half of this year, a back-end loaded expansion. With this in mind, we anticipate 14-nanometer revenue contribution to slowly pick up during the year and reach a pickup at the end of the year.

With regards to expansion, we repeat our commitment to prudent planning and a careful alignment with our customers. Meanwhile, our team is conducting ongoing FinFET tape-out projects and are working closely with both domestic and global customers. We are encouraged by the strong customer partnership being fostered as we co-develop our technologies and multiple applications.

40-nanometer applications include high-end consumer, high-performance computing, media applications, application processors, artificial intelligence and automotive ICs.

To address our progress, our N-plus-1 development is well underway, and we are closely engaging our customers for upcoming projects that may undergo qualifications later this year. We are seeing opportunities to address a variety of consumer-related applications from application processors to connectivity for mobile, televisions and the variables.

Meanwhile, we continue the research and development activities for beyond N-plus-1, as we strategically expand our addressable market to serve the growing sophistications of our customers. We are also tracking well in developing comprehensive solutions for our customers with robust IP libraries and an advanced mask making for our FinFET nodes.

I will now comment on our capacity expansion. As we entered an expansion stage to address the market for advanced technology, we must also boost our expenditures. We are increasing investments in capacity to address the new ramp-up of FinFET technologies. Our 2020 foundry CapEx is USD 3.1 billion, of which, $2 billion will be used for our new, advanced fab facilities and equipment. SMIC remains prudent in [its] expansion by carefully aligning our customer demands with company's operability and capability.

With the given spending, SMIC plans to move the equipment for the FinFET production into the new wafer fab this year in line with customer demand.

Now to give some insights on our 2020 outlook. In fourth quarter, we were already 99% utilized. The constraint on capacity also limits our growth to the extent to which we can add capacity and increase efficiency.

Our fourth quarter 2020 revenue is guided to be flattish to up 2%, which represents a 25% to 28% year-over-year growth compared to fourth quarter last year. As I mentioned, we entered 2020 optimistic about business growth. This optimism was driven by overall market trends and our successful developments of new technologies, which will enter production and contribute new incremental revenues as well as strong demand across our existing platform technologies as we had ramp up new customers and new [allocations] in the recent quarters.

Meanwhile, foundry industry growth in 2020 is being driven by trends in the Internet of Things, 5G, smart consumer, artificial intelligence and automotives. Given our current outlook, we are targeting annual growth in the [teens] percent for 2020. We also aim to maintain a gross margin of 20% and a targeted sustainable profitability.

To conclude, SMIC has executed in preparing technology platforms and advanced nodes development, thereby leading SMIC to its current stage of new growth and investment. We aim for healthy expansion that aligns with our global to be fundamentally solid while building up mutual trust with our clients. Our aim is to be the first choice in China for comprehensive range of foundry services. We are gaining confidence in our ability to [steadily] with focused prudent efforts to become a respected provider in the advanced node foundry market.

SMIC is benefiting from the expanding market in China as customers increase their capacity's capabilities, and SMIC also accelerates the development in order to serve these customers. At the same time, we believe the current health crisis will have a short-term impact. And going forward, China will continue to expand its role in semiconductor industry, and the consumer demand will pick up once again. We thank you for your continued support, and I thank you for joining us today. I will now hand the call back to Tim for the Q&A section of this call.

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Questions and Answers

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [1]

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Thank you, Dr. Zhao Today's Q&A will be hosted by our Co-CEOs, Dr. Zhao and Dr. Liang, and our CFO, Dr. Gao. I would now like to open up the call for Q&A. (Operator Instructions) Operator, please assist.

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Operator [2]

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(Operator Instructions) Your first question comes from the line of Randy Abrams of Crédit Suisse.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [3]

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Okay. Yes. And I appreciate the details. And I wanted to ask the question just about the CapEx now, with utilization running very high, where the spending would contribute to new capacity. So could you talk about both the FinFET? How quickly you plan to ramp from the 3,000 toward 15,000 in the first phase? And then for the 8-inch and mature 12-inch that's running full, what your plans are for fab capacity increase? And when that fab capacity you think can it start to allow additional revenue?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [4]

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Okay. Randy, I would address the FinFET parts, okay? As the original plan, our FinFET capacity installation, means a wafer start or starting from 4K in March, 9K in July and ramp to 15K in December. That's our current timing. The mature parts...

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [5]

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Yes. Randy, for the mature type, for 8-inch, we'll add on 30,000 wafers per month type of capacity for 8-inch in Tianjin, Shanghai and the Shenzhen fab. And we also add on 20,000 wafers capacity 12-inch in Beijing fab. And because the slowdown of the logistic and the shipments, and this kind of thing will be happening in the third quarter and the fourth quarter.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [6]

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Okay. And maybe a follow up to that. So third quarter, fourth quarter, does that mean capacity installed and you can get revenue for that capacity? Or there's time to qualify, so it would be more late year into next year? Just want to see if you're limited by capacity in the second half on revenue or that will actually contribute as well.

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [7]

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Yes. That's true. We will see the revenue contributions from the third quarter and then possibly the numbers I mentioned will become a full contribution in the fourth quarter.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [8]

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Okay. Yes. The second question I wanted to ask on advanced technology, 2 parts. I think on the FinFET, where you'll have a pretty good ramp through the year. I guess talk about the first wave, which applications are coming in on this first wave? And maybe if you could say that kind of the impact where you're guiding gross margin to 20%, like how much is from depreciation versus how much is maybe dilution from 14 still coming up to scale?

And the second part is the N-plus-1, just curious if you could go through. I think you mentioned about the production. If you could talk a bit more on the timing when that volume ramp-up you expect, and how that N-plus-1, I guess, compares to the 7 nanometer from like Samsung and TSMC if it's getting into that range? Or it's still more like an 8/10 nanometer? Just curious how it might stack up for the applications you could address?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [9]

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Okay. Randy, to address your question, the first wave of the FinFET production, the product, including [low-end] AP baseband and also consumer. Some [more] towards NTO and it will extend to the year of the connectivity, RF connectivity product. That is for 14. And there is extension, our 14 is a 12. Then, we will see more product NTO with a 12 that ranging from a blockchain application and low-end mobile AP and media, that kind of application. That's probably is a first wave and a second wave of 14 and 12 nanometer. And as to the N-plus-1, our NTO is just Q4 last year. So right now, it's currently under customer product verification stage. And we expect it to see the limited production in Q4.

Your last question about this N-plus-1, the definition of the N-plus-1, actually, we refer to our 14 nanometer, okay? And our 14 nanometer, we compare the 14 and the N-plus-1, performances improved 20% and power, it is 57%. And [lodged together] reduced to 63%. SoC area reduced to 55%. So if that, compared to the market, so-called 7 nanometer, actually, in terms of power and stability, they are very similar. The only difference is the performance for our N-plus-1, that is about 20% enhancement. But for market benchmark, it's probably around 35%. So that is the only gap.

So in terms of the power and scalability, you can call it very close to 7. And in terms of performance, that's indeed is [worse] than 7. So that is the definition. Because we target this N-plus-1 is a low-cost application. The [mask count] can reduce around 10 from normal to 7 nanometer. So that is a very a special application for that, yes. I hope I answered your...

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [10]

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Yes. No, I thought that was very helpful. The only one I'd squeeze in on that was on the margin on 14. As that ramps through the year, is that the factor for the margin where you're guiding to '20? Or I guess, maybe a combination with the depreciation?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [11]

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Yes. That is a good question. Okay. As you know, FinFET per K capacity is very high, right? It is roughly in the range of $150 million to $250 million per K investment. So our -- that's why you can see our capacity ramping is very cautious. We have to kind of balance between the customer demands, and also the overall budget constraints, and also minimize the gross margin impact.

In terms of the depreciation for that kind of ramping, since our depreciation is defined as wafer output over 3,000 and also maybe the 2 are moving after 6 months. So by that definition, the gross margin impact probably around -- for year overall -- 2020, overall gross margin probably within 5%, yes. That's a [lot to talk], but just very -- first order estimation, yes.

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Operator [12]

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Your next question comes from the line of Peter Chan of CIMB.

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Yiqun Chan, CIMB Research - Research Director [13]

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My first question, it's more on strategic level. On the grand scheme of things, the trade balance between the U.S. and China always been a top of concern. And I believe the semiconductor has to be part of the important equation. So what do you foresee the impact on SMIC if the trade war ends in happy ending, and U.S. may have to buy -- I mean, China may have to buy more semiconductor from the U.S.? And given the some recent development that, one, the GlobalFoundries and the TSMC recently (inaudible) litigation with open cost licensing. Theoretically, if we co-funding (inaudible). And in a cable management, they could [freely] do anything that TSMC does.

Then number two is that Samsung already procure a sizable [laying] (inaudible) often and ready for expanding the capacity there. So that's a scenario one. But if the trade war ends in a not so happy ending, I guess, then China, the local domestic customer have to source more from the local foundry such as SMIC. And that probably will benefit SMIC, and as soon as you can come up with the capacity, the technology schedule, everything.

So at this crossroad, what is your thought and the long-term strategy given the recent development?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [14]

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Peter, thank you for the question. Basically, as our name states, SMIC is international manufacturing. Our goal is to balance the overseas and the domestic revenue, 50-50. At this moment, because of the situation you mentioned just now, and our U.S. revenue has dropped from 2 years by 50% in the total revenue to 22% in the fourth quarter last year, and that really gave us a challenge. We need to find a way to expand our business in overseas. But its overall demand for semiconductor ICs are still there, possibly increase every year. So they have to be the buyer or producer from other places. And you see SMIC's revenue are in a growth period. And that means there has to be a replacement if one customer from U.S. could not supply the products. There has to be another customer to produce it, to cover that missing. And SMIC just tried both part.

On the one hand side, we continue to try our best to find the customers on the market from the oversea and in United States. And in the meantime, if there's a customer meeting the similar product, since we already have the experience and the technologies in the similar product manufacturing, we can do to the replacements.

And so to answer your question directly, we should say SMIC will maintain our strategy to be an international company and to develop overseas markets and customers. And in the meantime, we are really working very hard on the segmentation of the market. It doesn't matter the segmentation market supported by U.S. customer, European customer, Asian customers, once we become the top 2 or top 3 players in manufacturing for the segmentation, and we can maintain our market shares. For example, CMOS image sensors, BCD analog, low power, specialty memories and MCUs. For this kind of segmentation market, the overall demand are increasing every year.

Definitely, the players inside are interchanging. But as long as SMIC have the market share in the segmentation of each market, we can make sure that our business will continue to grow. And that's the way.

And the second thing, just now, you mentioned a lot of companies are trying hard at this moment, litigation, set up the manufacturing site [in days]. And we very closely monitor the development. And at this moment, what we can do is that SMIC is still relatively small. And we just expand our technology platforms to make sure we can deliver more diversities to our customers, more solutions to our customers. So we believe that in the short term, midterm and we can gain market share instead of losing market share from the trade wars.

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Yiqun Chan, CIMB Research - Research Director [15]

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Okay. My second question is related to your forecast. Given the outlook that you just provided and also the latest expectation of the technology mix and the contribution going forward, under this -- the most recent outlook, what is your expectation that at the EUV level would turn positive without the R&D grant? What that time frame might be maybe to 2021? And when that might happen?

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Gao Yonggang, Semiconductor Manufacturing International Corporation - CFO, Executive VP, Joint Company Secretary & Executive Director [16]

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(foreign language)

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [17]

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Okay. Let me translate for Dr. Gao. [Interpreted] So from government funding on R&D in 2019, was around USD 2 billion -- $200 million. $200 million.

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Gao Yonggang, Semiconductor Manufacturing International Corporation - CFO, Executive VP, Joint Company Secretary & Executive Director [18]

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$200 million.

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [19]

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$200 million. Yes, sorry. Excuse me, USD 200 million. For year 2020, the R&D grant from the government would be more because we have more projects to be closed. Also on the growing depreciation and amortization, we believe that our EBITDA for the coming years will be growing.

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Operator [20]

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Your next question comes from the line of JunJie Chen from Tianfeng Securities.

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JunJie Chen, Tianfeng Securities Brokerage Co., Ltd., Research Division - Research Analyst [21]

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(foreign language)

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [22]

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So let me translate for this question. So the first quarter guidance was in between 2 -- 0% to 2%. And as the analyst estimated from his model, the 14 nanometer already contributed 1% in fourth quarter 2019. So he's asking about whether we will see the growth catalysts from 14 nanometer or from other growing -- from other catalysts?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [23]

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(foreign language). Basically, we should say this way, in the fourth quarter, SMIC has been running 99% utilization and that meeting 1% [mainly] and contributed to the R&D (inaudible) wafers. So for the fourth quarter, we mainly benefit and for the advanced nodes, more or less the same as the fourth quarter. And we mainly benefit a little bit incremental revenue from the more wafer start in the fourth quarter. And when we compare the wafer start quality in the third quarter and the fourth quarter last year, our wafer start in the fourth quarter is better than the third quarter. More or less to say, our fourth quarter utilization is higher than third quarter utilization, but this kind of wafer have not come out of 100% in fourth quarter. Quite many (inaudible) come to the shipment stage in the fourth quarter. So we should say this is the transfer effects from the overall 100% loading.

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JunJie Chen, Tianfeng Securities Brokerage Co., Ltd., Research Division - Research Analyst [24]

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(foreign language)

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [25]

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The capacity (inaudible).

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [26]

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Go ahead, JunJie.

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JunJie Chen, Tianfeng Securities Brokerage Co., Ltd., Research Division - Research Analyst [27]

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(foreign language)

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [28]

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So the analyst is addressing his second question. It's about the coronavirus situation impact, whether the inventory situation will be changed, if under a very extreme case, that this will be ended extra 3 months. So how should we manage this supply chain impact?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [29]

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JunJie, basically, we should say this coronavirus event will have negative impact on our industry and revenue. That's a sure thing. Just at this moment, we can now have a very clear picture of the overall impact. For the first quarter revenue and gross margin, SMIC had communicated with our customers, and there's no impact at this moment. We believe this kind of impact will slowly show up in second quarter.

And for SMIC, the fourth quarter last year and the first quarter, at this moment, we're still in a stage of short capacity. That means our wafer orders are above our capacity. So the first stage, when this kind of impact to show up, there won't be a direct impact to SMIC's revenue because anyway, we [cannot] follow up the total wafer orders in our fab. And we believe that we can use this kind of efforts and to cover the second quarter, but we want to monitor the situation very carefully.

And the third quarter, at that moment, we have additional capacity, we also have additional technology platform and the product platform to show up. And we believe, at that moment, we can [hedge] -- or compensate a lot from the fluctuations in the adjustment of inventory. We believe, especially for the domestic customers, the adjustment in their inventory will definitely happen. And roughly, we also know the percentage, they need to adjust. From the careful calculation in my hands at this moment, we believe that we can still manage and make sure [it must reach] full-loading stage will be maintained.

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Operator [30]

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Your next question comes from the line of Bill Lu from UBS.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [31]

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Yes. My first question is on the mature nodes, 2-part question. One is, I know you're now running at 99%. I'm wondering if you have more room to convert additional 28 to maybe 55 and 65, and therefore, get a little bit more capacity as the year goes on?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [32]

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Okay, Bill. And for 28-nanometer technology, SMIC have set up the capacity convertible, interchangeable with a 40 nanometer except the high-K metal gate metal [node]. So we already built other capacity that way. And we maintained -- in order to maintain our profitability and our gross margin, we'll limit the total volume running 28 nanometer because of the cost is running 28 nanometer, high-K metal gate are very high. And everybody knows the market is oversupply situation.

And so your question is whether or not we can convert 28-nanometer capacity interchangeable with a 65 and a 55, the answer is yes. Actually, in SMIC, we have consolidate the capacity for 12-inch in bigger fab, in a very big fab in Beijing. So the fab is running more than 100,000 wafers' price. Their capacities are interchangeable to support each other. Based on the allocation to (inaudible) customers, we can adjust the ratio for 28-nanometer capacity and a 55-nanometer capacity.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [33]

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So could you give me a sense for how much more capacity there is to convert over, if there is enough demand from 55 to 65?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [34]

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20,000 wafers. Just I mentioned, we'll have (inaudible) wafers...

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [35]

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Additional...

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [36]

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We will have additional 20,000 wafer from our 12-inch. And this is a great deal process. That means we are converting now. In the third quarter, we have more and converting capacity in 55 nanometer. In the fourth quarter, we will have full conversion with the capacity.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [37]

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Okay. Got it. My second question is on the N-plus-1 node. I don't know if I missed it, but can you give us a little bit more details on the timing in terms of risk production in terms of when you think there's no -- will come to market?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [38]

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So N-plus-1 node, the first, the NTO is Q4 last year. So right now, it's still at a customer product verification and qualification stage. It is expected to see the limited production in Q4.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [39]

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A limited production in Q4 of this year?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [40]

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Yes.

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Operator [41]

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Your next question comes from the line of Szeho Ng from China Renaissance.

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Szeho Ng, China Renaissance Securities (US) Inc., Research Division - MD [42]

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It's Szeho from China Renaissance. 2 questions from my side. First one regarding the tape-out. Could you share with us the number of tape-out you're working on for the 12 nano and also 14 nano?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [43]

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Yes. Yes. For the 14 nanometer, we have the limited NTO, but with significant of order, most of NTO. And we will ship it to the 14 [RF] for the connectivity, then we'll have even higher volume. And for 12 nanometer, we have many NTOs, more than our 14 nanometer. That's a current stage, yes.

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Szeho Ng, China Renaissance Securities (US) Inc., Research Division - MD [44]

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Okay. Great. All right. And second question, right now, with the company running at 99% utilization, is it possible for the company to overdrive the capacity to say -- to achieve a utilization over 100%?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [45]

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Theoretically, you can't run more than 100% for a long term. For short term, that's a possible and that this mainly means that for the [nonbottleneck] machines, you can run to finish the process beforehand. And that means the [bottleneck], for example, bottleneck is 100, but the other machines, nonbottleneck will be more than 100. You can run movie for a FinFet or fab. And we wait there until you get a new machine for bottleneck, and you have the sudden opening of this bottleneck gate. Then the whole fab is running more than 100%. You get them a point, that means you're running more wafers to buy time. And then you get a machine, you can -- you don't need to wait for the wafer coming to the bottleneck machine. That's our play. And another short term is sometimes you can do that way and you can stretch the bottleneck machine to run more than 100% calculated capacity.

But overall, you can't run it along. Because sooner or later, you need to do the necessary stuff. You need to do a lot of things. So for example, for SMIC, we are running multiple products, and every product is running in a small volume. And based on the transfer time from one product to another product, your scanner that definitely lost time for changing mask, for qualification, for double checking on environments.

But if you're running single product, single label, you can run that scanner much more wafers in each hour, but this is just a short-term risk-making type -- risk-taking time. And theoretically, yes, you can do it that way or cannot run a long.

And for SMIC, the rule is that if you can continuously running at the level, the level will become our capacity right away. So our capacities, the number is not from building up capacity but from the actual runnings, so we adjust every month. So if last month, you're running 100%, 9 months that's not 100%. It's (inaudible). So that's saying, [we can't be] running more than 100% for a long term.

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Operator [46]

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Your next question comes from the line of Leping Huang from CICC.

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Leping Huang, China International Capital Corporation Limited, Research Division - Analyst [47]

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Okay. The first question is to Dr. Liang. So I think in the call, you mentioned that you are developing the platform beyond the N-plus-1. So since you just elaborate your N-plus-1, it's quite close to 7-nanometer TSMC and Samsung. So is it -- you are moving to EUV? Or you are -- it's an upgrade version of the current N-plus-1?

Also, the second part of the question is that for the CapEx you are spend in this SMIC [sales]. So for the $2 billion, after you spend the $2 billion, so you manage to spend around this current 14 and the 12 or your -- these are also including part of the CapEx for the N-plus-1?

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Mong Song Liang, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [48]

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Okay. Leping, let me just try to address your 2 questions. First question is about anything beyond the N-plus-1, I stated earlier about the N-plus-1 definition and beyond N-plus-1, that means N-plus-2. That definition, that basically is only the performance difference, okay? In terms of the power and scalability, they're quite similar, okay.

N-plus-1, N-plus-2, the difference is between -- it's just for the cost, okay, low cost. We call it N-plus-1, okay? So that is the difference between N-plus-1, N-plus-2. And you asked about, do we use the EUV, okay? At this moment, for both N-plus-1, N-plus-2, we do not plan to use the EUV. And when EUV get ready, then we will switch the N-plus-2, a few layers to the EUV. So that is the current plan.

Now your second question is regarding the capacity around this $2.1 billion. That consists both the N -- 14 and 12 also to the N-plus-1 and N-plus-2. A small portion of that, yes. It's not purely for the 14 and 12, yes.

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Leping Huang, China International Capital Corporation Limited, Research Division - Analyst [49]

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Okay. It's very clear. So the second question is about the SMIC nodes or the majority on the Beijing fab. So since the mature node of your demand is very strong for various applications, how much room you still have to -- for the capacity expansion in Beijing? So -- and after you spend this, I think, $500 million, if I remember correctly, what were you -- CapEx. So how much capacity you are reach by the end of this year?

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Haijun Zhao, Semiconductor Manufacturing International Corporation - Co-CEO & Executive Director [50]

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On Beijing fab and fab space, everything was designed to holding 120,000 wafers from the technology, 28 nanometer to all the way to 19 nanometer, but the product mix keep changing. If we dedicate 70,000 wafers to do 28 nanometer but that needs a lot of tools, a lot of space. But with the limitation on 28-nanometer capacity, we can convert it in capacity calculation, we'll run more than 120,000 wafers. We can run 128,000 wafers and total capacity. That's the number we will reach by the end of this year.

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Operator [51]

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There are no further questions at this time. I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.

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Tim Kuo, Semiconductor Manufacturing International Corporation - IR Director [52]

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

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Operator [53]

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Thank you. This is the end of SMIC's fourth quarter earnings conference call. We thank you for joining us today. You may now disconnect the call. Thank you.