Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2019-Q2

[Operator]

Welcome to Semiconductor Manufacturing International Corporation Second Quarter 2019 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. [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 like to introduce to you Mr. Tim Kuo, Director of Investor Relations, for the cautionary statement.

[Tim Kuo, executive]

Good morning and good evening. Welcome to SMIC's Second 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 U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange Limited including our annual report of Form 20-F filed with the United States Securities and Exchange Commission on April 30, 2019.

During the call, we will make reference to financial measures that do not conform 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 will now hand the call to our CFO, Dr. Gao, for financial highlights.

[Yonggang Gao, executive]

Thank you, Tim. Greetings to all our listeners. First, I will highlight our second quarter results and give the third quarter 2019 guidance.

In second quarter 2019, our revenue was $791 million, an increase of 18% quarter-over-quarter mainly due to the increase in wafer shipment. Gross margin was 19%, a sequential increase mainly due to the rise in utilization and the better product mix in the second quarter. Non-GAAP operating expenses were $249 million, lower than guidance range mainly because of control of R&D and G&A expenses in the second quarter. Profits for the period attributable to SMIC was $19 million. Noncontrolling interests were $44 million of credit to SMIC's attributable profit, higher than the guidance range mainly due to the currency exchanges loss from RMB depreciation for our joint venture.

Moving to the balance sheet. As of the end of the second quarter, cash on hand including financial assets were close to $3.7 billion. Gross debt to equity was 44%, and net debt to equity was 5%. In terms of cash flow, we generated $190 million of cash from operating activities in the second quarter.

Now looking ahead into the third quarter of 2019. Our revenue is guided to be flat to up 2% quarter-over-quarter. If excluding revenue from LFoundry, our revenue is guided to be up 2% to 4% quarter-over-quarter. Gross margin is expected to range from 19% to 21%. Non-GAAP operating expenses are expected to range from $294 million to $300 million. Noncontrolling interests of our majority-owned subsidiaries are expected to range from positive $25 million to positive $27 million, which are losses to be borne by noncontrolling interests. We maintain the planned 2019 CapEx for foundry operations of approximately $2.1 billion which is mainly for the equipment and the facility in our majority-owned Shanghai 300-millimeter fab and the FinFET R&D line. The planned 2019 CapEx for nonfoundry operations is approximately $106 million. Our planned 2019 G&A is approximately $1.1 billion. Our 2019 gross margin is expected to be in the range of high teens to 20s.

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

[Haijun Zhao, executive]

Thank you, Yonggang. Thank you all for joining us today. Today, I will give an overall business and technology overview. Then Mong Song, Yonggang and I will answer questions from the line.

Let's begin by highlighting the results of our second quarter, then I will update you on our mature node technology and education platforms, advanced technology progress, capacity plans, business development and our outlook for the year.

As guided, our second quarter results are much better than our first quarter with the strong rebound in sales as our customers digested the inventories to a higher [ CR ] level. Our second quarter revenue increased by 18% quarter-over-quarter due to strong seasonality and a robust recovery in the demands for 12-inch mature nodes. Meanwhile, our gross margin improved to 19% compared to 18% in the first quarter due to better product mix on the fab utilizations.

From a geographic point of view. Revenue from China and Eurasia grew significantly, 25% and 30%, respectively. And our sales from North America experienced a slight growth of 0.5%.

Our communication applications grew strongest with an increase of 34% largely from the rebound of demands from our customers of smartphone and the connectivity-related applications. Overall wafer shipments in the second quarter increased by 18% quarter-over-quarter.

Looking at breakdown by nodes. 65- and the 55-nanometer nodes, revenue grew notably across a variety of customers and device applications such as logic, RF, Back-End Illumination CMOS Image Sensors, image sensor processors and the NAND Flash. 40-nanometer node also grew substantially as connectivity increased sequentially. We are pleased to have seen a significant growth coming from our mature node technology platforms. We have also developed a number of new customers in application areas using existing process platforms.

Allow me to highlight some of these. One mention about platform is our CMOS RF connectivity for IoT, which is a strong growth driver for us in this year, which we are ramping using our 12-inch technologies. We are also seeing good demands in our 8-inch mixed signal and our RF connectivity with new products ramping such as electronic toll collection, ETC, which use 0.11 to 0.18 micron technologies. Moreover, we see good performance from our CMOS Image Sensor platform from the notable growth of image sensor processors and the back-end CMOS Illumination Sensors. And we look forward to this platform's continued growth.

Our NAND Flash platform is providing stable business. As orders recovered in second quarter, revenue from NAND Flash nearly doubled compared with the first quarter. In addition, our 28-nanometer is still progressing prudently on technology and manufacturing.

Our 28nm HKC+ has begun shipments and has strong demands. We are expanding our customer base and have new customers that are taking us. Our 28 PolySiON will phase out as the High-K shipments continue to grow. Demands for 28-nanometer High-K is stemming from our key applications such as application processors, Internet of Things, set-top box and IPTV. In the meantime, we seek to fulfill current customers' demands. However, we do not plan to expand 28-nanometer capacity in the short term.

During 2019, we've seen an increase in shipments of High-K which will be majority of our 28-nanometer output. We've engaged with customers on the diversifying of our 20-nanometer technology offerings. Furthermore, our research and development is accelerating, and we continue to focus on FinFET development. As the first generation of FinFET technology, our 14-nanometer is progressing quite smoothly. We are proud to say our 14-nanometer is in risk production. This marks an important milestone for SMIC as we now have the most advanced technology in Mainland China.

We are beginning an approach and engaged with a good number of global customers. We like to take this chance to thank our customers for their trust and their continued support as we advance forward on FinFET technology path. Meanwhile, there are more than a dozen tape-out projects, and our customer base is expanding. On top of that, we are ahead of schedule and is back to start to seeing meaningful revenue contribution from 14 technology by year-end.

We express our gratitude to our employees for all the hard work and the long hours they put into company. Without them, we will not be where we are today.

In addition, our FinFET technology is ready for auto-related applications with successful tape-out delivery. This expands our FinFET portfolio into automotive and represent a breakthrough for SMIC. Subsequently, our team has made steady progress on 12-nanometer which provides an enhanced version of our first-generation FinFET technology. Customer engagement is going smoothly, and we are expecting several tape-out by the end of this year. The national development of our FinFET technology has provided the foundation for accelerated R&D progress. As a result, development of our second-generation FinFET N+1 technology is moving along rapidly. In the meantime, we are starting to engage with customers for N-plus-1 business opportunities. We began customer engagement for 14-nanometer a year ago and now for N-plus-1. This is unprecedented in the history of SMIC. We are expanding our FinFET product portfolio to address various applications including application processors, high-end customers, auto and AI.

In terms of automotive electronics, although the global automotive demands and shipments have shrunk, the number and the contents of wafer per vehicle have increased, and the growth of momentum of the market demands in the future is still promising. To add, the arrival of a 5G will usher in new spurs of developments of AI, cloud computing, smart city, automotive electronics and other applications. It is a nice wave of opportunities for SMIC. We can grab on these opportunities through diligent planning, preparation and the development.

Now let me talk about our CapEx and the capacity plan. Our original foundry CapEx plan of USD 2.1 billion was mainly for the purchasing of equipment and the facility constructions of our Shanghai JV FinFET line. We now increased our planned foundry CapEx to $2.3 billion. This incremental spending is in line with increased confidence in demands as we spend to upgrade capacity to capture the growth spurred by the change such as IoT and the migration from 4G to 5G.

At the same time, we are making changes to address economics of scale and to centralize operations. During this period, we have focused on making adjustments to business in Italy and the capacity in our Shanghai R&D fab, and so this transition impacts our revenue growth of this year. We target to complete this transition in the next few quarters.

Moving on to SMIC South, our JV FinFET fab. The first batch for fab equipment has moved in and will manufacture the most advanced wafers in Mainland China. The new mini line will release capacity and start production in the fall of this year. As we adjust and expand our capacity to support the needs of our customers, we'll continue to utilize our joint venture model for our advanced node facilities. To address recent business development, the transaction to transfer our foundry ownership was completed in July. As a result, Q3 will account for 1 month of our foundry revenue only and, thereafter, will no longer be included in our reporting.

Looking out to 2019, our first quarter bottomed out, second quarter bounced back with increased demand as inventory digested, and we're expecting our second half will be better than the first. For third quarter, we expect another growing quarter, strength coming from mature nodes applications such as CMOS RF, CIS, PiSi and IFP and a muted revenue growth mainly as the result of our foundry disposal and higher second quarter revenue base.

Uncertainty in the market environment still remains. Customers are regaining some confidence but remain cautious. We maintain a conservative view because of ongoing trade frictions between China and the U.S. which has impacted the global consumer demands and the investment confidence. In spite of economic situation, our 8-inch and 12-inch mature technology is in a healthy state.

To conclude, we strive ahead through expanding reformation and building a sturdy foundation while shaping our capacities to grow in diversity. We are pleased to say that we have delivered on our technology development from a first-generation FinFET 14-nanometer to second-generation N+1, secured business opportunities from our platforms from Bluetooth, CIS to specialty memory and around the new product applications from the ETC to IFP.

We proceed to focus on building commercial platforms, advancing technology, establishing strong relations as well as maintaining our position as the preferred foundry partner in China. Moreover, we'll play the role in the global semiconductor industry by providing competitive services and complete solutions. We are confident that SMIC will continue to be the most advanced IT foundry in Mainland China.

We thank all of our shareholders in their ongoing support, and we work to keep our commitment to balance growth and profitability.

Once again, thank you for joining us today. I will now hand the call back to Tim for the Q&A session of this call.

[Tim Kuo, executive]

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

[Operator]

[Operator Instructions] Your first question comes from the line of Randy Abrams of Crédit Suisse.

[Randy Abrams, analyst]

I wanted to ask the first question. Just on the second quarter, it looked like you had a good mix or recovery on the advanced -- the more advanced nodes like 65-, 45-nanometer and a bit from 28. The -- based on the shipment growth though, it looks like blended ASPs were only relatively stable rather than picking up. So I'm curious if it was at certain product mix within the nodes or if there's ongoing pricing -- or maybe the fact that you could go through that.

[Haijun Zhao, executive]

Thank you for the question. The second quarter, basically, we add on the primary thing is the recovery of the market for the existing products; and the second thing is we add on incremental, that means new customers, new products in our 12-inch. For the 8-inch, definitely, ASP will be stable because our 8-inch fab has been fully loaded from last year until this moment and the next stage. And so for 8-inch, this will be the same. And for 12-inch and the ASP for the new product more likely are on the mature technology nodes, and they are comparable to the previous case. And basically, we should say the recovery of the demands of the existing customer we maintain the same. And for the new products, especially for the volume and, for example, we say CIS, memories and BCD, analog, power, this kind of product, we already have the existing base. So even though we have the add on the incremental customer on the demand, it would see more likely the effect.

[Randy Abrams, analyst]

Okay. Great. And I wanted to ask on the CapEx. It sounded like in the prepared remarks, the comments were a bit better feeling on the new capacity to pull in a bit more CapEx. So could you recap on the mini line how much capacity you'll get? And then based on that, how are you starting to see the ramp-up from customers, if you could talk about like the second stage beyond the initial mini line for next year, if we should expect, let's say, a bigger CapEx here for FinFET? And are you also seeing -- it sounded like you're a bit conservative on FinFET. You're waiting for N+1 last quarter. But are you starting to change your expectation on the FinFET ramp over the next 1 to 2 years, that it could actually grow in line or better than 28?

[Haijun Zhao, executive]

Randy, actually, this question, content has quite many different angles, and I'll answer the CapEx first.

CapEx, in fact, we already forecast that we have USD 2.1 billion. Majority of this will be used for the building up of FinFET line in Shanghai joint venture to manufacture the most advanced technology products. And just now, Dr. Gao and my reports also highlights that we have one disposal of our operations in Italy. So the overall capacity in SMIC on mature technology nodes actually reduced. And the second thing is that because we ramp up the FinFET, we increased the activities in Shanghai R&D fab. And we also slowed down and finally stopped the routine operation of the original technology nodes like the 14-nanometer and 20-nanometer in Shanghai. We consolidate them into Beijing 12-inch mega-fab. And because today our 12-inch manufacturing capacity also reduced, decreased and -- but we have very strong demands, we are running both 8-inch, 12-inch fully loaded, and we have the customer there, we have to make sure that we can meet their essential requirements. That's why just now we mentioned that for the mature technology nodes, at the beginning of this year, we do not plan for the expansion.

At that moment, we are -- we weren't so firm about the disposal of the operation in Italy and the shutdown of the operation for the mature technology in R&D fab. But finally, we make that decision and this kind of thing already completed. And we have to make sure during the transition stage, we tape out our mature technology capacity. That's why Dr. Gao and I are highlighting that and to catch the opportunity in the market and meeting the requirements of our customers. And we need to add up certain capacities on the mature technologies. That's why the CapEx, we mentioned that this year, and we are working on the increased part on the mature technology. And this is for the CapEx part.

And for the mini line just now for 14-nanometer in Shanghai joint venture, most advanced, I already answered. And your questions that for the ramp-up N-plus-1 for the next 1 or 2 years, the right person is Mong Song.

[Mong Song Liang, executive]

Okay. Let me try to add on some comments about this new fab capacity ramp-up planned. At this moment, we have the 2 phase, right, the 8-inch fab is the Phase 1, Phase 2. The Phase 1, many is converted for R&D for the N -- N-plus-1 and N-plus-2. And the mini line's current built-in is 3K. 3K is for the 14 and 12 production. And we will gradually ramp up to 6K, 9K, 15K hopefully by the end of the next year, right, to fulfill current customer demand. And that P2 -- Phase 2 lines will contain not only the 14 and 12 and also N-plus-1 and some other portion of N-plus-2 R&D. So I think that at this moment is our grand plan from now to end of the next year. I hope I've answered your questions.

[Randy Abrams, analyst]

Okay. Yes. And the final question, one last. On the OpEx, you mentioned cost control has been a bit below the non-GAAP operating expense guidance actually the last couple of quarters. It is rising into next quarter, so could you talk about the driver on the spending for that increase? And do you expect that to be a new kind of base to build from, or is it a short wave of spending coming through?

[Haijun Zhao, executive]

Randy, you know we are selling our -- the advanced fab in Shanghai. That's the joint venture. And we're starting up the running of the fab. And definitely, we see the running health of this wafer fab in the ramp-up stage. So that's the major addition of the OpEx. Yes. And the other thing for the R&D is we already have the forecast.

[Randy Abrams, analyst]

Okay. When you ramp, does it shift the COGS at some point when you go into production, or that will stay in OpEx?

[Mong Song Liang, executive]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language] And just now, yes, Dr. Liang also mentions that also. I also say that. And we started this kind of manufacturing in the new wafer fab. And we expect it would be started in the second half of this year or the year-end. So we expected this kind of running cost of the new wafer fab will be converted to manufacturing costs at the beginning of next year.

[Operator]

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

[Leping Huang, analyst]

So the first question is about your full year guidance. I remember in the beginning of this year, you mentioned that you target to achieve in line with the industrial growth of flattish revenue growth. After this, a lot of adjustments on different [ potentialization of projects or the disposal of revenue ]. What's your current guidance for the full year revenue? Can you hear me?

[Tim Kuo, executive]

Yes. We can, Leping. So we're working on.

[Haijun Zhao, executive]

Leping, thank you for the questions. And basically we should say, [ we -- that may ] include the LFoundry revenues, we have this kind of forecast. So current forecast is that we will [Technical Difficulty] [ more likely stands ] if exclude the LFoundry revenue, and we should say that if we exclude the disposal revenue from the second half of this year, our whole year's revenue will be in line with the industrial trend.

[Leping Huang, analyst]

Okay. So if my calculation is correct, so it's implied that it's close to 20% sequential growth in the fourth quarter versus third quarter. Is my understanding correct?

[Haijun Zhao, executive]

Because our second quarter revenue is higher than the first quarter, and original plan, [ that means ] the number in our revenue for our foundry for the second half of this year is $120 million to $130 million. So if we exclude that part, and -- the original, that means flattish type of revenue this year than last year because of -- we have the transition for the R&D operations. And now we further dispose the LFoundry, that means second half this year, and deferred revenue part will be reduced by $120 million something. But we are trading better in this second half performance. Even though without LFoundry's contribution, second half performance is better than the first half.

[Leping Huang, analyst]

Okay. And the second question is also about the CapEx. So the cost for you -- so each year, you spend $2.3 billion for around -- for the [ mini lines around 3K ]. So how should we expect the runway -- ramp-up of where we start the P2 -- or to complete Phase 1 and also the -- we start to ramp up the -- our introduction of the Phase 2 equipment? So should we expect a large increase of the CapEx next year?

[Haijun Zhao, executive]

Yes, later. I'll answer something first, and later ask Dr. Liang to give the comments on this question. Basically, the planning for USD 2.5 billion is for the whole company. And now because we have the disposal of LFoundry Italy operation and we have the transition of the machines from Shanghai to Beijing, there's a breakdown of the operations in 12-inch also, and we have the shortage of the capacity. So this year, we made up some new capacity to meet our customers' request. So $2.1 billion, $2.3 billion mainly come to these points for the whole company. And the joint venture [ 3K ] FinFET capacity is just a part of it. It doesn't mean all the money, $2.1 billion, get into the joint venture. It's too early to make the comments on the spending of next year. We are still working on this.

[Operator]

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

[Szeho Ng, analyst]

Congratulations on the technology breakthrough. Regarding the N-plus-2, now you're already in the client engagement phase, is it fair to assume that revenue contribution could happen throughout the -- in the latter part of 2021? I'm sorry, I mean 2021, right.

[Haijun Zhao, executive]

Nice to get your question again. Actually, it's N-plus-1, just now, we did not mention anything about N-plus-2.

[Szeho Ng, analyst]

No. I mean the revenue contribution for N-plus-1, when should we assume it?

[Mong Song Liang, executive]

Okay. Let me try to answer this question. The N-plus-1, we are still at the early stage of the customer engagement, so it's very difficult to predict contribution for this product, for this technology yet.

[Szeho Ng, analyst]

Okay. And then the other question, as 14-nano would start ramping up in Q4, how should we expect the cost structure changing for the company? Because historically, when you ramp up a new node, some of the OpEx will be shift to cost of goods sold. I just want to have some idea how we should model it going forward.

[Tim Kuo, executive]

Szeho, could you say your question again?

[Szeho Ng, analyst]

Yes, yes. In Q4, as you start ramping up the 14-nano, so historically, when you ramp a new node, there's sometimes a change in the -- a charge booking, right, from the OpEx level to cost of goods sold. I just want to get some idea how it's going to change this time.

[Tim Kuo, executive]

[Foreign Language]

[Mong Song Liang, executive]

[Foreign Language]

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

Okay. Let me translate this statement. So for 2019, we estimated around USD 100 million in terms of the 14-nanometer FinFET technology-related expense at the OpEx level which will be converted into the COGS in 2020. So therefore, the overall cost will be more realistic in 2020.

[Operator]

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

[Yiqun Chan, analyst]

My first question is -- go back to the utilization rate improvement in the second quarter. Could you comment on how much of that is maybe coming from a market share gain? And how much of that is coming from the new business development?

[Haijun Zhao, executive]

Just now we say that for the 8-inch operations, yes, SMIC has been running for full capacity for the past 2 years. So basically, we'd say that we are -- our 8-inch business mainly from the existing customer base and the existing market shares, we do not see a big change in the market share or incremental things on the 8-inch. But for the 12-inch and -- the first quarter, the first quarter last year, we experienced the adjustment in the market. So currently, we are controlling the 8 allocations. Basically, we should say, and we have big incremental demands for our 12-inch capacity. But to balance the recovery of existing customer demands and the new customer, new demands, and we try to balance that. And I gave you a number, possibly I should say 30% or 1/3 is the recovery of existing market and customers and 2/3 come from incremental new customer, new demands.

[Yiqun Chan, analyst]

Okay. The reason I ask the question is because the utilization rate of your peers in the same period may not be so high. So in this industry-wide demand recovery, other foundry, they should see a similar improvement in utilization rate. But SMIC, particularly, seemed to have the better utilization rate. That's why I'm wondering maybe some part of that is from market share gain.

My second question would be the -- a lot of other foundries are now started offering advanced packaging such as fan-out, such as co-ax, it's becoming increasingly popular due to the -- some call center applications who need to have a high level of integration but can't afford a fairly expensive wafer technology. What's SMIC's current -- the status in the advanced packaging offering?

[Mong Song Liang, executive]

Okay. I think that's a strategic question -- questions. Indeed, for packaging side, we also have a mid- and long-term plan. As you know, we have a joint venture of the SMIC to SEC -- SJSemi and JCET is 2 partners. And these 2 partners have different technology capability. So for the general purpose type of packaging, we work with SJSemi. And for more advanced part, we work with JCET. So we make a plan for advanced -- particularly for advanced FinFET type of different technology nodes, different package trend, and we make a long-term plan to develop those packaging technology for our customer. And this will start -- we will see results start from second half of this year and more result in year '20 and '21.

[Yiqun Chan, analyst]

Okay. In terms of the revenue recognition, since you work with the partners on this, the -- how is the revenue recognition going to be? How do we model the revenue recognition from the advanced packaging service to your mutual customers?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

Okay, let me translate. So for these advanced technology packaging, the revenue contribution will be recognized at the strategic partner. So for SJSemi or JCET, the revenue doesn't belong to SMIC.

[Yiqun Chan, analyst]

Okay. Just a follow-up to that. [Foreign Language]

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

[Interpreted] Okay. So the advanced packaging expenses will be listed in our strategic partners, not here in SMIC.

[Operator]

Your next question comes from the line of Sebastian Hou from CLSA.

[Sebastian Hou, analyst]

I think that in your prepared remarks, you talked about that you have already received dozens of tape-outs on the 14-nanometer. So can I just clarify, that is all 14-nanometers? And -- or if not, what's the tape-out progress?

[Mong Song Liang, executive]

Yes. At this moment, most of tape-out is from the 14, and there's a few of them from 12, yes. But most of them indeed, you're right, it's in 14.

[Sebastian Hou, analyst]

Okay. Okay. So actually the dozens of tape-out includes both 14 and 12, but the 14 accounts for the majority.

[Mong Song Liang, executive]

Yes, right.

[Sebastian Hou, analyst]

Okay. Got it. And I remember last quarter Dr. Liang mentioned about the -- for the 12-nanometers, more likely to -- on schedule to reach risk production by end of this year. And the total schedule [Technical Difficulty]

[Tim Kuo, executive]

Sebastian, we can't hear you. Sebastian, we lost you in some words. So could you say your question again?

[Sebastian Hou, analyst]

Okay. Yes. Yes. Okay. I just wanted to have an update on the production schedule of 12-nanometers. Are you still on track to reach risk production by the end of this year? And does it have too much difference in terms of timing between 14-nanometer?

[Mong Song Liang, executive]

That's correct. As -- so last quarter, I mentioned about production -- risk production will be end of this year. And when are we seeing a couple of the early tape-out, but it's also approaching end of this year, yes. So there's not much change from last quarter's announcement.

[Sebastian Hou, analyst]

Okay. Okay. My second question is regarding the 5G opportunity for SMIC. Just can you help us understand what's the opportunity? What kind of chip you are seeing here, particularly in [Technical Difficulty] this year and how much...

[Mong Song Liang, executive]

Well, maybe I will try to answer the risk question. For the 5G, we all know 5G will start second half of this year, move strongly from next year. So in our side, well, for FinFET part, FinFET part is solid. Advanced technology cannot really serve like a server or networking or even kind of a mainstream mobile part because those applications require 5-nanometer, 6-nanometer or 7-nanometer. So we were not doing the plan at this moment. But there are a lot of other areas such as sub-6 G RF CMOS or even higher frequency like millimeter wave RF CMOS. Also, we have our 14 RF to serve their customer.

Okay. And for those kind of a little bit [indiscernible] wave and millimeter wave, we also have 28, 20, 22-nanometer RF to fulfill that customer -- fulfill that market area. And also for the automotive part, as Dr. Zhao mentioned earlier, we also have [ grade 1 levels ] 14-nanometer plus RF. And we also will try to move into to the connectivity part that is also using our 14 and 12 RF. So there is plenty of these things we are preparing right now to kind of enter this 5G [ 14-nanometer ] market.

[Sebastian Hou, analyst]

Great. Just one follow-up on your comment, that -- it looks to me that on the volume, millimeter wave is good progress, but it may not contribute to revenue immediately, maybe in the next 12 months. But your comment on the sub-6 gigahertz RF CMOS, that will probably like to see some revenue contribution into 2020. For example, such as RF transceiver, am I interpreting that right?

[Mong Song Liang, executive]

I mean that's a great question. But to be -- practically, okay, the technology, RF technology, to start with and to start and to really mass production normally, it will take 36 months, nearly 3 years, okay, to see really the volume production. So I will say maybe by end of the next year, we will see small volume of the production. But for a major production, wait until year '21. So next year, probably the revenue-wise for this kind of sub-6 G is also very minimal, yes.

[Sebastian Hou, analyst]

Okay. Okay. Based on the -- if we combine this with what you already mentioned about the dozen tape-outs on 14- and 12-nanometers, we do see some of this sub-6 gigahertz RF CMOS [ these ratchet up in -- ] already more 14- and 12-nanometers.

[Mong Song Liang, executive]

Yes, I think you asked also a very detailed question. When I mentioned the risk production or the tape-out, it means there's a real product. But starting this year and also next year, we will have many MPW related to this sub-6 G and millimeter wave RF CMOS, and that's preparing for the data part next year and the earlier year 2021 for a product NTO, yes.

[Operator]

The last question comes from the line of Rick Hsu from Daiwa Securities.

[Rick Hsu, analyst]

My first question is probably for Yonggang. I remember last quarter, you mentioned about -- something about $17 million-plus disposal gain from the LFoundry sale. Did you recognize that gain in your second quarter or you pushed back to Q3?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

[Interpreted] So the disposal gain of LFoundry is not listed in second quarter. It will be listed in third quarter.

[Rick Hsu, analyst]

Okay. Great. [Foreign Language] Now the other, want to -- just about your 28-nanometer revenue contribution. I think you guys are making very good progress about your ramp-up of the HKC+. So could you give us guidance that how much you expect the 28-nanometer altogether to ramp up the revenue contribution in Q3 and Q4?

[Haijun Zhao, executive]

Rick, you know that for 28-nanometer, our stance is very clear. We already built out the capacity to meet the strategic customers' requirements, and we keep running that way. And on the average, for the whole year, we expect that 4% of the revenue come from 28-nanometer High-K Metal Gate. And the customer do request more capacity to support, but we maintain [ either, how I would say, a ] safe volume to run this 28-nanometer, and you know the situation, we mentioned that before in previous quarter release.

[Rick Hsu, analyst]

Okay. Great. Last question is about your 14-nanometer ramp-up. I guess you also mentioned earlier about it takes some time to ramp up to reach the scale economies. And I guess due to initial ramp-up, it should be kind of margin dilutive. So would that impact your overall gross -- corporate gross margins in 2020? And if so, could you give us some guidance about your 2020 gross margin? How does it look like?

[Haijun Zhao, executive]

Rick, just now, actually, we -- Mong Song already answered certain parts of the question, and Dr. Gao also mentioned about USD 100 million will be counted into the operation costs the early next year. And we haven't really come up the detailed exact numbers, and we are working on that. It's too early to mention that, and we are trying our best to increase -- to balance the maturity technology into revenues and gross margins and diverting of the ramp-up of the new technology wafer fab.

[Operator]

We have ran out of time for any more question. I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.

[Tim Kuo, executive]

In closing, we would like to thank everyone, fund managers, analysts, 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's fourth (sic) [ second ] quarter earnings conference call. Thank you for joining us today. You may now all disconnect.

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