Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to Semiconductor Manufacturing International Corporation Second Quarter 2023 Webcast Conference Call. This call will be simultaneously streamed to the Internet and telephone. However, after the conclusions of the management's presentation, we will have a question-and-answer session at this time, you receive instructions on how to participate. [Foreign Language]

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

[Guang Li Guo, executive]

Greetings. Welcome to SMIC's Second 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.

[Foreign Language]

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 U.S. dollars, unless otherwise stated.

[Foreign Language]

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

[Unknown Executive]

[Foreign Language] First, I will report our unaudited operating results for the second quarter and the first half of 2023, followed by our guidance for the third quarter.

[Foreign Language] The second quarter's operating results are as follows: revenue was $1,560 million, up 6.7% sequentially. Gross margin was 20.3%, down 0.5 percentage points sequentially. Profit from operations was $80 million. EBITDA was $1,201 million. EBITDA margin was 76.9%. Profit attributable to the company and non-controlling interest were $403 million and $61 million, respectively.

[Foreign Language] Moving to the balance sheet. At the end of the second quarter, the company had total assets of $45.8 billion, of which total cash on hand was $18.3 billion. Total liabilities were $15.9 billion, of which total debt was $9.7 billion. Total equity was $30 billion. Debt to equity was $32.2 billion and net debt to equity was negative 28.9%.

[Foreign Language]

In terms of cash flow in the second quarter, we generated $796 million cash from operating activities. Net cash used in investing activities was 2,348 million. Net cash from financing activities was $704 million.

[Foreign Language]

The company's unaudited operating results for the first-half of 2023 are as follows: revenue was $3,023 million. Gross margin was 20.6%. Profit from operations was $163 million. EBITDA was $2,152 million. EBITDA margin was 71.2%. Profit attributable to the company was $634 million.

[Foreign Language]

For the third quarter 2023, our guidance is as follows: revenue is expected to grow 3% to 5% sequentially, and gross margin is expected to be in the range of 18% to 20%. This concludes the financial status. Thank you.

[Guang Li Guo, executive]

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

[Unknown Executive]

Greetings to everyone. We are halfway through 2023. It's my pleasure to communicate with you at our earnings release conference again.

[Foreign Language]

Compared with the views we shared in May last quarter, our activation on the market hasn't changed much. Although both China and the global social life have fully returned to normal. The demand for electronic products are still below the expectations and inventories are way above the comfortable levels as well. The system makers are searching the base of confidence and IT companies are cutting spending for efficiencies.

From the perspective of the overall market, smartphones and consumer electronics industry are still in innovation bottleneck period. The demand is not increasing, but decreasing and the replacement cycle has been prolonged. While personal computer, industrial, automotive and some other sectors demand have gradually stabilized, and the IT industry has touched the bottom, but is still confronting with a number of challenges, including the speed of destocking being slower than expected, the lack of momentum in demand growth as well as the impact of geopolitics.

[Foreign Language]

In the second quarter of 2023, although the wafer shipments increased by 12% sequentially. ASP declined by 7% due to price adjustments and changes in product mix. And as a result, revenue increased by 6.7% sequentially to $1.56 billion. By region, as there is a time lag in the cycle domestically versus abroad and the pace of destocking is different. Revenue from China region increased to 80% of total revenue, with revenue amount growing by 13% sequentially, while revenue from other regions accounted for 20% of total revenue.

By service type, revenue from wafer accounted for 90.5% and others for 9.5%. By application, wafer revenue from smartphone, IoT, consumer electronics and others accounted for 27%, 12%, 27% and 35%, respectively, although the overall demand has not shown a strong rebound based on what we have seen from our customers other, inventory of some chips used for smartphone and consumer electronics in domestic markets has begun to decline, and customers have gradually resumed orders placements such as CIS, ISP, high-voltage driver, MCU and et cetera. Industrial control and specialty memberships and et cetera. Driven by these factors, the company's utilization rate in second quarter increased by 10 percentage points sequentially to 78% and revenue from smartphones increased by 20% sequentially due to decreasing orders in areas of wireless lan, routers and others.

Revenue from IoT declined by more than 20% sequentially, even though the mid-end and low-end TWS and WiFi demand still solid in the Chinese market. By size, wafer revenue contribution from 12-inch increased to 75% with relatively full demand, while wafer revenue contribution from 8-inch declined to 25% due to weak customer demand and utilization rate was lower than that of 12-inch but still better than the industry average.

[Foreign Language]

In the second quarter, the company's gross margin declined 0.5 percentage points to 20.3% mainly due to a decline in blended ASP and rising depreciation costs.

[Foreign Language]

By the end of the second quarter, monthly capacity increased to 754,000 8-inch equivalent wafers with an increase of 40,000 wafers compared to the beginning of the year. In the second quarter, the company spent a total of $1.7 billion on capital expenditures. In the first half of the year, the company spent a total of $3 billion.

[Foreign Language]

In the third quarter, we expect to see a repeat of the situation at the second quarter. With shipment volume increasing and blended ASP declining. We expect the company's revenue to grow by 3% to 5% sequentially and gross margin to be between 18% to 20%.

Here are a basis for our guidance, the product inventory of main design companies in China is gradually decreasing, especially some of the new products are gradually building inventory in preparation for end product shipment for the second half of 2023 and next year. The company's shipments are expected to continue to increase in the third quarter. Meanwhile, the depreciation will also continue to increase. With the efforts to gain market share in a downturn cycle, the company's revenue in the second half of the year is expected to be better than that in the first half.

[Foreign Language]

Currently, China remains the world's largest consumer market for integrity circles and discrete devices, accounting for 35% to 40% of the global market, although because of the reconfiguration of the supply chain and the reallocation of resources, it is foreseeable that the competition will be more intense in the future.

We have long-term confidence in this industry and what we pursue is long-term development. Based on comprehensiveness, leadership and scale effect of our major platforms and technologies in a domestic industry. We will continue to strengthen our technology R&D and platform development, verify new products quickly arrange the supporting capacity as soon as possible and fully prepare for the next run of growth cycle.

[Foreign Language]

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

[Foreign Language]

[Guang Li Guo, executive]

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 proceed.

[Operator]

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

[Randy Abrams, analyst]

Okay. Yes. Thank you. Good morning. The first question I wanted to ask on the pricing environment. You mentioned, second quarter, the pricing declined 7% sequentially. Could you talk about how you're seeing pricing continue into second half? Are you seeing any stabilization or at least moderation of declines? And how do you see that continuing as we look second half into next year on pricing? Thank you.

[Unknown Executive]

Hi, Randy. Thank you for the first question. Talking about the price from the first half to the second half, basically, we see the situation in markets, a state. The first one is that the pricing for the small products, very unique products are different from the commodity on very large volume products. It is kind of a downturn of the industry when we're really ramping up the capacity, we have to absorb a lot of high-volume standard products like [ DDIC ], CMCO major, CMCO major processor, specialty memory, these type of standard high-volume products, even though they are requiring a lot of new technology and new tools.

For this kind of standard high-volume product, their price is relatively lower than the unique smart volume products. So that's come to the ratio of the context of the total product running. So for the first year and the second half year, when we increased the volume to make our 12-inch wafer 5 fully loaded -- and then we have this kind of ratio getting higher, that means standard products, high-volume products ratio, getting higher. They put down the normalized product as a whole. This is one part.

And the second part is, for the 8-inch wafer fabs and capacities, we are met with three major challenges. The first one, the high-volume PMIC products might abate the downturn of smartphones. The inventories are way too high. So for this kind of PMIC product loadings getting lower price definitely trending down. And the second thing for the 8-inch wafer fabs, they are supplying the analog power market, but we see the international IDMs are really coming back using low price to compete with the fabulous designers. For this area, the market is going down and the orders guiding smaller, and price going lower.

And the last one is the our CD driver for the large pinata [ TSMC ] is the third player in the 8-inch wafer fabs. And -- the market is really going down because of the shrink of the demands. So, 8-inch wafer pricing are really going low together with the high-volume products getting higher ratio. So we see by quarter the AIC normalized AST is going lower. Normalized that's the situation. So for the second half of this year, we see higher volume, higher --, higher utilization in the fab, but we see the ASP are going down.

[Randy Abrams, analyst]

Okay. If I could ask a follow-up to that? We're seeing more competitors or equipment companies are noting a lot of new companies building fab capacity. How are you seeing the competitive pressure? And how do you view the effective capacity from some of the new players like where you see them competing?

And I guess, rolling back to your business, do you think the margins as utilization recovers, do you have a level you think margins come back to? Or do you think around similar levels given the pricing?

[Unknown Executive]

Yes. Randy, let me say this way. This year is a downturn year, and we cannot use this year's demand and pricing as average for the next 3 to 5 years. Last year and the year before were the years really at the peak of the industry cycles. So when we look at the situation side, -- and we have to normalize the years through the booming and the downturn so that we got a relatively reasonable predictable type of price.

And the second comment is that at this moment, we really see the new capacity, the era the competitions are very strong. But mainly on the area, everybody can do easy to get in and that is the portion, just now I mentioned, 8-inch wafer fabs and the commodity type of things like our CD driver, CMOS imagers, these types of products.

But if we look at the total product portfolio in the market, they are more than 10,000 type of different applications. Anybody who can really fabricate really produce, deliver the highest quality of products and get the renovation every year, and they are still maintains a very competitive on the orders and the pricing. So we should say this way. On the back-hand side, SMIC is a relatively small size in scale. And in the market, what we are growing in the capacity does not impact too much to the overall foundry industry.

The second thing that we are doing differently from the other people slowly where we specify more unique products so that we really hang our scale in the high-quality portion. In the meantime, I believe that one of the key things in the foundry business is the management had took out a long time successful experience. They have the proven system in manufacturing and in time, they deploy enough resources to really deliver the customized technologies for customers.

And with this kind of hypers, I believe SMIC, even though meeting up very strong challenges from the late commerce and the capacity, we still can go ahead to do SMIC's planning and market development.

[Randy Abrams, analyst]

Okay. Thank you. If I can follow-up the 8-inch where you're running relatively better, but it's an issue for the industry. How do you see with the focus on specialty, did you believe there's the business to refill that capacity? Or could we be entering a longer period of underutilization? And can you pull back the plans where you have some capacity, I guess, put on hold for the 8-inch expansion?

[Unknown Executive]

Randy, for 8-inch capacity expansion, actually, SMIC has almost completed. And more or less in the next couple of years, we say with the capacity we already built up as today, not too much, but we really diversified the product platforms and put in the development efforts with our customers together. And 8-inch, at this moment, we should say because of the three factors just now, I mentioned the smartphones and the international ID hams and RCD driver, things are really going down -- and for the long run, I believe the 8-inch capacity in the foundry business are more is very balanced. And when we build up this kind of capacity, we have the customer commitment to this kind of capacity.

And just now I mentioned that today is the bottom of a downturn, we couldn't use today's utilization as an average for next 3 to 5 years. We really believe that when the market is coming back when the mobile devices go back to normal and the capacity will be fully utilized.

[Randy Abrams, analyst]

Okay. Thank you, Dr. Zhao.

[Unknown Executive]

Sure. Thanks, Randy.

[Operator]

Our next question comes from the line of [ Shang ] from Haitong Tenzing. Please go ahead.

[Unknown Analyst]

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[Unknown Executive]

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[Unknown Analyst]

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[Unknown Executive]

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[Unknown Analyst]

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[Unknown Executive]

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[Operator]

Thank you for the question. One moment for the next question. Next on the line, we have the questions from Leping Huang from Haitong. Please go ahead.

[Leping Huang, analyst]

[Foreign Language]

[Operator]

Thank you for the question. Next question comes from the line of Szeho Ng from China Renaissance. Please go ahead.

[Szeho Ng, analyst]

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[Unknown Executive]

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[Szeho Ng, analyst]

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[Unknown Executive]

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[Szeho Ng, analyst]

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[Unknown Executive]

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[Operator]

Yes. Thank you for the questions. One moment for the next question. Next question comes from -- Wang from -- Securities. Please go ahead.

[Unknown Analyst]

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[Unknown Executive]

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[Unknown Analyst]

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[Unknown Executive]

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[Unknown Analyst]

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[Operator]

Thank you for the questions. [Foreign Language]

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

[Guang Li Guo, executive]

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

[Operator]

This concludes SMIC's second quarter webcast conference call. We thank you for joining us today.