Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2023-Q1

[Operator]

[Interpreted]

Welcome to Semiconductor Manufacturing International Corporation's First Quarter 2023 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and telephone. [Operator Instructions]

Without further ado, I would like to introduce Ms. Guo Guangli, Senior Vice President and Board Secretary to host the webcast.

[Guang Li Guo, executive]

[Interpreted]

Greetings. Welcome to SMIC's First Quarter 2023 Webcast Conference Call. Attending today's call are Dr. Zhao Haijun, Co-Chief Executive Officer; Dr. Wu Junfeng, Senior Vice President and Person-in-charge of Finance.

Let me remind you that today's presentation may contain forward-looking statements that do not guarantee future performance, but represent the company's expectations and are subject to inherent risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement.

Please note that today's earnings statement is presented in accordance with International Financial Reporting Standards, IFRS, and all currency figures are in US dollars unless otherwise stated.

I will now hand the call to Dr. Wu Junfeng to introduce the company's financial status.

[Junfeng Wu, executive]

[Interpreted]

First, I will report our unaudited financial results for the first quarter of 2023, followed by our guidance for the second quarter.

The first quarter's financial results are as follows. Revenue was $1,462 million, down 9.8% sequentially. Gross margin was 20.8%, down 11.2 percentage points sequentially. Profit from operation was $83 million. EBITDA was $951 million. EBITDA margin was 55.1%. Profit attributable to the company and non-controlling interest were 231 and $36 million, respectively.

Moving to the balance sheet. At the end of the first quarter, the company had total assets of $45 billion, of which total cash on hand was $19.3 billion. Total liabilities were $15.4 billion, of which total debt was $9.4 billion. Total equity was $29.6 billion. Debt to equity was 31.6%, and net debt to equity was negative 33.5%.

In terms of cash flow, in the first quarter, we generated $802 million cash from operating activities. Net cash from investing activities was $23 million. Net cash from financing activities was $921 million. For the second quarter 2023, our guidance is as follows. Revenue is expected to grow 5% to 7% sequentially and gross margin is expected to be in the range of 19% to 21%.

This concludes the financial status. Next, let me recap the relevant matters related to the company's 2022 Annual Report. According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profit during the annual reporting period and its accumulated undistributed profits are positive, but no cash dividends are distributed, the company should provide a key explanation on matters related to the cash dividend plan in earning webcast after the disclosure of the Annual Report and before the record date of the Annual General Meeting.

The company's 2022 revenue and gross margin increased significantly from the previous year. According to China Accounting Standards, by the end of 2022, the accumulated undistributed profit was RMB 30.9 billion. In 2022, the net cash generated from the company's operating activities after deducting cash paid for the purchase and construction of fixed assets, intangible assets and other long-term assets resulted in a negative free cash flow of RMB 5.6 billion.

The foundry industry in which the company operates is a capital-intensive industry. Continuous capital expenditure and capacity building are among the key drivers for the company's future scale growth of revenue and profit. The capital expenditure in 2022 was RMB 43.24 billion. The capital expenditure in 2023 is expected to maintain roughly flat compared to 2022, which exceeds 10% of the company's latest audited net assets.

Taking into account the company's current operating situation and future development plans, the company plans not to distribute profit for the year of 2022, which is in line with the company's long-term development needs and the long-term interest of shareholders and in accordance with relevant laws and regulations, regulatory documents and the company's profit distribution policy. There are no circumstances that harms the interest of the company and its shareholders.

The plan has been revealed and approved by the Board of Directors and published in Annual Report, and will be submitted for approval at the Annual General Meeting on June 28. We would like to thank our shareholders for their understanding and support.

[Guang Li Guo, executive]

[Interpreted]

Thank you, Dr. Wu.

Next, I will hand the call to Dr. Zhao Haijun to comment on operations.

[Haijun Zhao, executive]

[Interpreted]

Thank you for your continuous support to SMIC, and welcome to the first quarter 2023 earnings call.

In the first quarter, the whole IC industry was still at the bottom. As well, we explained in February, the industrial and automotive sectors were relatively stable. The supply chain inventory of mobile phone and consumer electronics still remained high. The market demand for existing old products, especially standard products with large volume and low price has further declined.

The company actively adjusted the product mix to optimize the revenue structure and improve the blended ASP and achieved the revenue of $1,462 million, down 9.8% sequentially and slightly beat guidance. Gross margin was 20.8%, which was close to the high end of our guided range.

Starting from the first quarter of this year, we have adjusted the application classification of our revenue in quarterly earnings report, mainly in order to facilitate the communication with product companies and end-user companies. We have referred to the industry practice of application classification and the overall adjustment are as follows. First, we have segregated IoT from others as an individual sector. Second, we have split the original smart home sector, among which smart TV, smart lock, set-top box and some other subdivisions have been reclassified to the sector of consumer electronics, while modem, LAN-related network connectivity subdivisions have been reclassified to the sector of IoT.

No matter how we make the classification, there are still some common products that still span multiple application scenarios, but we still hope to optimize the classification through the adjustments. In terms of the adjusted classification in the first quarter, smartphone, consumer electronics, IoT and others accounted for 23%, 27%, 17% and 33%, respectively.

Revenue from smartphones declined by more than 20% sequentially, while revenue from consumer electronics and IoT remained flat sequentially. Under the sector of others, revenue from auto continued to grow, with auto platforms such as 40-nanometer embedded memory continuously being launched. We expect the gradual increase in the revenue of related platforms, along with the growth of the new energy vehicle industry.

By platform, eNVM, embedded non-volatile memory, and specialty memory, NOR, NAND platforms, have shown signs of recovery with revenue increasing by more than 20% sequentially. By region, revenue from China, America, and Eurasia accounted for 75%, 20% and 5%, respectively. In the second quarter, we expect that the company's capacity utilization rate and shipment will perform better than first quarter. Revenue is expected to increase by 5% to 7% sequentially, with a decline in blended ASP due to the impact of changes in product mix. Gross margin is expected to be between 19% and 21%.

Here are bases for our guidance. First, although the global market is still at the bottom, however, compared to 3 months ago, we have perceived the rebound in Chinese customer confidence in different areas. Second, demand for some standard products has bottomed out. High-voltage drivers, CIS, and specialty memory, which first entered the destocking stage last year, have shown positive momentum. Third, the domestic end-user companies are actively conducting innovation, seeking for market breakthroughs and promoting the realization of new products and new launched functions. Thus, the rush orders from these companies have rapidly increased.

In order to better serve our customers during the launch of new products, we have taken multiple measures such as increasing investments in resources, ensuring technical support, shortening product cure time to the greatest extent, dealing with online abnormal situations as quickly as possible, so as to speed up the pace of new products entering the production and striving to deliver products to customers earlier. Currently, 40 and 28-nanometer have recovered to full utilization. However, in the short term, due to bottlenecks on capacity mix and platform revenues, it will take time for the new products to realize rapid revenue growth.

The company carries out capital expenditure in line with the expansion plan. According to the pace of production capacity, construction, if we take a fab line with a monthly capacity of 50,000 wafers, 12-inch equivalent as the standard, this means, in each year, we have one new fab start construction and one new fab start production. Following is the plan of how we will arrange the platform deployment of production capacity and enhance the competitive advantages.

Our existing capacities, which means old fabs, relying on their R&D advantage and model of old fabs to [ journeying ] new fabs, further leverage their mother fab effect on improving the learning curve and operational efficiency of the new fabs. Our incremental capacities, new fabs, will have their own focus and concentration advantage. SMIC Shenzhen will focus on high-voltage driver and CIS.

SMIC Xiqing will focus on analog and power management products. SMIC Jingcheng and SMIC Oriental will have relatively more diversified product platforms to fill the market gap. Currently, SMIC Shenzhen has entered mass production. SMIC Jingcheng is expected to enter mass production in the second half of the year. SMIC Oriental is expected to start the mini line by the end of this year. SMIC Xiqing is still under the construction.

Looking ahead to the full year of 2023. Although the revenue bottoms out in the second quarter, the visibility of recovery magnitude for the second half of the year is still not clear. Overall, we haven't seen the signs of market's full recovery. Thus, the full year's guidance remains unchanged. Revenue is expected to decline by low-teens percentage year-over-year, and the gross margin is expected to be around 20%. We will strive to do better based on the current situation.

Facing the dynamic market changes, we will continue to follow the strategy of being market-oriented and customer-focused, strengthen communication with the end market. We will fully cooperate with the launch of new products and make adjustments to fix bottleneck issues, so as to meet the next round of growth cycle.

Here, I would like to thank all employees, customers, suppliers, investors and communities for their continued trust and support to the company. Thank you.

[Guang Li Guo, executive]

[Interpreted]

Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Zhao and Dr. Wu. Chinese questions will be answered in Chinese. English questions will be answered in English. Please limit your questions to 2 per person. I would now like to open up the call for Q&A.

Operator, please assist.

[Operator]

[Operator Instructions] First question comes from the line of Randy Abrams from Credit Suisse.

[Randy Abrams, analyst]

Okay. Yes. Good to see the business starting to improve a bit. I wanted to ask the first question on the 8-inch versus the 12-inch. The first quarter shipment decline implies a good blended price improvement. Could you discuss for 12-inch and 40 and 28, a bit more on the applications driving that strength? And then for 8-inch, areas of weakness? And then for second quarter, do you see that same mix trend or do you see improvement on 8-inch or still good momentum on the advanced 12-inch?

[Haijun Zhao, executive]

For the first quarter, the drop of the orders always look at the utilizations of the capacity, mainly drop is in the 8-inch. That also answer questions that why when we have the lower utilization, lower revenue, but ASP is getting higher because the losing of the wafer orders mainly come from the low end standard products with lower ASP, especially in 8-inch loadings such as the low-end CMOS imager, fingerprint ICs, large panel LCD drivers et cetera. And the first quarter, this kind of product -- standard product orders were very low and make the 8-inch utilization getting lowest of -- bottom level type utilization.

On 12-inch, definitely, we also get affected, but not so much as 8-inch. That's come to the second quarter, the recovery of the revenue and the utilization, we see these rush orders mainly come in for the new products, for the 12-inch, especially for 40-nanometer and 28-nanometer. Just now in my discussion, I already said that our fab, the 40-nanometer and 28-nanometer have been running full loading stage, already recovered to 100% utilization. And the area for this kind of recovery, we see in the first one is the DDIC for the mobile phones, small amount for the monitors and related CMOS imagers and RED drivers and the other applications.

The reason behind this recovery mainly happens in China, is that we see the supply chain is shuffling. That means new suppliers getting into the supply chain, they get the orders, they get the market shares. And fortunately, these kind of new joiners are the customer of SMIC. So what we saw in the recovery for SMIC may not be the overall market. That could be the overall market currently still is very dynamic and -- but SMIC's market share getting higher.

[Randy Abrams, analyst]

That's helpful. Just a follow-up to the first question. Do you see that continuing, like the momentum through next few quarters? And how much capacity are you bringing on? So is there constraint in that area, or do you have a lot of the tool moving from the last year so that, that can grow the next couple of quarters?

[Haijun Zhao, executive]

So these rush order, we can say that very, very firmly. Just now in my statement, we also say that. We haven't seen the clear picture of the whole year, but we do see the supply chain reshuffle and new opportunities for certain customers, they get a larger market share. And whatever already happened can be a sure thing throughout the year, but it depends on the overall [indiscernible] SMIC, we see [ add on ] capacity reach to a high level. We need the overall market recovery inside of the supply chain reshuffle. And so at this moment, we are still very cautious. And we know that.

What we already got this kind of market share, this kind of customer products, new products. There is no inventory for these kind of new products and the production will be continuous throughout the year, but we are not very sure whether or not we will have further add-on on top of the current utilizations. We look and see.

[Randy Abrams, analyst]

Okay. The second question I want to ask actually is just on inventory, customer inventory and pricing because the balance sheet for your customers' inventory looks quite high. But are your customers indicating they are comfortable and want to keep these high levels? Or are they seeing a need and may take a long time? Like that they want to actually draw down to much lower levels? So just curious how they feel on inventory reduction. And on -- for the pricing, I think it's highlighted in the outlook, there would be a bit lower pricing as we come off the bottom. Do you think we'll see ongoing pressure or we start to -- from this -- after the reduction, start to see some stabilization there?

[Haijun Zhao, executive]

Yes, Randy. For the old products or standard products, the inventory in the markets, including SMIC's customers are still very high. So their major efforts still like to maintain or even de-inventory on these kind of stocks. What we have already built up for this prebuild type of inventory still at a very healthy level. To be honest, it's not higher than before. When we have this 2017, 2018, 5, 6 years back, we built out a similar level before with a larger size of SMIC's capacity today and the inventory of prebuild is considered pretty safe at this moment.

And just now, I mentioned that for the recovery of the production, we'll continue production and we realize on 2 things. One thing is the existing products, very likely the inventory is relatively high on the markets. We just calculate, with the RTA, how many months they will consume this kind of inventory. We have to make sure they are relatively safe. But in the meantime, these rush orders mainly for the new products, new functions, new performance, and in the market, there is almost no inventory for these kind of products. So for these kind of new products, the concerns on the inventory level is very low.

So what I mean is, we built a relatively safe level for the existing products or the old products, but we trail back to get our inventory for the new products. The challenge to SMIC is that we do have many, many new products come in, and we take time to make the mark to run a silicon wafer and work together with customer to get a full qualification. So the efficiency to ramp up the production of the new product is the key for SMIC's recovery in the second half of this year and next year.

[Operator]

Now next questions will now come from the line of Leping Huang from Huatai.

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Operator]

Next question comes from the line of Szeho Ng from China Renaissance.

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Next up, we have the line from Jiulu Li from CICC.

[Jiulu Li, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Jiulu Li, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Jiulu Li, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Next up, we have the line from Ziyuan Wang from CITIC Securities.

[Ziyuan Wang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Ziyuan Wang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Ziyuan Wang, analyst]

[Foreign Language]

[Operator]

[Foreign Language] I would now like to hand the call back to Ms. Guo Guangli for closing remarks.

[Guang Li Guo, executive]

[Interpreted] Thank you for participating in today's conference call. Thank you for your trust and support.

[Operator]

[Foreign Language] This concludes SMIC's first quarter webcast conference call. We thank you for joining us today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]