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Semiconductor Manufacturing International Corp
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[Foreign Language] Welcome to Semiconductor Manufacturing International Corporation's Third Quarter 2021 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet at SMIC's website. Webcast playback will also be available approximately 1 hour after the event. [Operator Instructions] Today's conference call will proceed in both Chinese and English.
[Foreign Language] Without further ado, I would like to introduce Ms. Guo Guang Li, Board Secretary for the forward-looking statement.
[Foreign Language]
[Interpreted] Greetings. Welcome to SMIC's Third Quarter 2021 Webcast Conference Call. Attending today's call are Dr. Gao Yonggang, Acting Chairman, Executive Director and Chief Financial Officer; Dr. Zhao Hai Jun, Co-Chief Executive Officer; and Dr. Liang Mong Song, Co-Chief Executive Officer.
The call will last about 60 minutes. The management will provide their commentary in Chinese and Investor Relations will provide English interpretation. During the subsequent Q&A session, we will accept questions in both Chinese and English.
[Foreign Language]
[Interpreted] The earnings release and presentation are available at www.smics.com. Let me remind you that today's presentation includes forward-looking statements that do not guarantee future performances, but represent our estimates and are subject to risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings statement uses International Financial Reporting Standards, IFRS, and all currency figures are in U.S. dollars unless otherwise stated. Please refer to the financial tables in our announcement for details.
[Foreign Language]
[Interpreted] First of all, we invite Dr. Gao Yonggang, Acting Chairman, Executive Director and Chief Financial Officer, to speak.
[Foreign Language]
[Interpreted] The year 2021 is not an ordinary year. Since SMIC was placed on the entity list by the U.S. on December 18, 2020, the company has faced tremendous challenges in production and operations. Since the beginning of the year, we have focused on the 2 main priorities of ensuring operation continuity and continuous capacity expansion, realigning the supply chain and finding ways to optimize the procurement process, accelerate supplier qualification and improve production planning and engineering management.
At present, operation continuity has been basically stabilized. Expansion of mature technology is progressing in an orderly manner and advanced technology business is steadily improving. Starting from the second quarter, in response to the problem of capacity tightness, we have further defined our capacity allocation tactics. We orderly allocated capacity, optimized production scheduling and look at actual end demand from the perspective of end user companies in order to support the needs of the overall customers and try our best to solve the problem of customer chip shortage. Our approach to capacity allocation and price adjustments has received relatively good feedback from our customers.
[Foreign Language]
[Interpreted] Throughout this year, in the face of complex situations, we continue to adhere to compliant operations with a spirit of truthfulness and pragmatism and continue to overcome difficulties with robust resilience, solid strategic focus and precise work tactics. This year's performance is expected to be improved significantly compared to the expectations at the beginning of the year. The Company's quarterly revenue continued to climb and annual revenue target is further revised upwards. Thank you to all our employees, customers, suppliers, investors and community for your trust and support.
[Foreign Language]
[Interpreted] It should also be noted here that, as stated in our announcement, 4 of our Directors have tendered their resignation, and we respect the decisions of these resigning directors. We would like to thank them for their contributions to the development of SMIC. Dr. Liang will focus on his duties as Co-Chief Executive Officer of the Company; and Dr. Chiang will act as an adviser to the Company. Our current Board of Directors consists of 11 Directors, which is basically comparable to the size of the Board of Directors of other companies in the industry. In the short term, we will not increase the number of Directors. The above changes do not have any material impact on the company's operations.
[Foreign Language]
[Interpreted] Next, I will report unaudited financial results for the third quarter of 2021, followed by fourth quarter guidance and the full year outlook. Unless otherwise stated, the following financial data is presented in accordance with IFRS.
[Foreign Language]
[Interpreted] Both revenue and gross margin for the third quarter reached record highs. Revenue was $1,415 million, up 5.3% sequentially and 30.7% year-over-year. Gross margin was 33.1%, up 3 percentage points sequentially and 8.9 percentage points year-over-year. Profit from operations for the third quarter was $310 million, down 42.3% sequentially and up 69.7% year-over-year. Excluding the proceeds of $231 million from the disposal of SJ Semi in the second quarter, profit from operations for the third quarter grew slightly sequentially. Profit attributable to the company was $321 million and profit attributable to non-controlling interest was $51 million.
[Foreign Language]
[Interpreted] Moving to the balance sheet. At the end of the third quarter, the Company had total assets of $33.3 billion with total cash on hand of $15.7 billion, which includes cash and cash equivalents, related to restricted cash and financial assets. Total liabilities were $9.8 billion, of which total interest-bearing debt was $6.4 billion, non-interest-bearing debt was $3.4 billion, while total equity was $23.4 billion. Total debt to equity was 27.3% and net debt to equity was negative 39.7%.
[Foreign Language]
[Interpreted] In terms of cash flow, in the third quarter, we generated $559 million cash from operating activities. Net cash used in investing activities were $816 million. Net cash from financing activities was $586 million.
[Foreign Language]
[Interpreted] For the fourth quarter and whole year, our guidance and outlook are as follows. In the fourth quarter, revenue is expected to grow 11% to 13% sequentially, and gross margin is expected to be in the range of 33% to 35%. Non-IFRS operating expenses are expected to increase sequentially and profit attributable to non-controlling interest is expected to decline sequentially.
Based on the results of the first 3 quarters and the guidance of the fourth quarter, the Company's full year revenue growth target is further revised upwards to around 39% and gross margin target is maintained at around 30%. As for capital expenditures, we accelerated the speed and intensity of execution quarter-by-quarter, although facing uncontrollable factors such as license approvals, supply chain tightness, and logistical variables caused by the epidemic, we expect to basically complete our full year capital expenditure plan this year.
This concludes the financial statements. Thank you.
[Foreign Language]
[Interpreted] Thank you, Dr. Gao. Next, I will hand the call to Co-Chief Executive Officer, Dr. Zhao Hai Jun to comment on market, company operations and technology platform status.
[Foreign Language]
[Interpreted] Thank you for attending today's webcast conference call. In the past year, the IC industry landscape has rapidly changed with the demand for local indigenous manufacturing, resulting in a thriving domestic chip market for mid-to-high end analog display drivers, MCUs, CIS and et cetera. However, the local capacity supply shortage is still huge. The Company has spent a lot of time communicating with end user companies and system companies to gain a deeper understanding of end market demand and has adjusted capacity allocation accordingly and give support as much as possible with the limited production capacity.
[Foreign Language]
[Interpreted] In terms of mature technology, our key competitive products built on mainstream application platforms still cannot fulfill the demand in the market, especially in the domestic end market and the incremental production capacity at each node is rapidly filled once released. At the same time, in order to match our customers' future product migration path, the development of mature application platforms in different nodes is also deployed in full preparation.
[Foreign Language]
[Interpreted] For advanced technology, the effect of customer engagement and the buildup of product diversification has become more apparent and part of new tape-out projects have transitioned into mass production successively and capacity utilization continues to improve. In the long run, smartphones, short-range home connectivity, interactive data processing, industrial electronics and many other applications have a huge demand for FinFET technology. If the conditions permit, we will expand our production lines according to customer needs.
[Foreign Language]
[Interpreted] For the company as a whole, the third quarter revenue exceeded $1.4 billion and gross margin exceeded 33%, both record highs. Looking sequentially, the main growth drivers came from product mix optimization and price adjustments. In terms of wafer revenue by technology, the combined revenue of FinFET and 28-nano rose to 18%. Revenue contribution from 40 nano, 45 nano, 55 nano, 65 and 0.15 micron, 0.18 micron were 14%, 28% and 28%, respectively.
In terms of wafer revenue by application, smartphone, smart home, consumer electronics and other applications accounted for 32%, 12%, 24% and 32%, respectively. Looking at wafer revenue by the product platform, high-voltage driver chips for large and small screens continued the rapid growth trend in the first half of the year, and revenue in the third quarter increased by 88% sequentially. In addition, mainstream MCU, RF Wi-Fi and other platforms also performed well. By region, Chinese Mainland and Hong Kong, China, North America and Eurasia accounted for 67%, 20% and 13% of revenue, respectively.
[Foreign Language]
[Interpreted] This year, the equipment arrival time has been extended due to factors such as license approval time, the delivery time of the vendors, the impact of the epidemic on logistics and et cetera. The Company's overall 8-inch equivalent monthly capacity expanded to 594,000 wafers at the end of third quarter, an increase of about 32,000 wafers from the end of the previous quarter. In the fourth quarter, about another 10,000 wafers capacity will be released. Overall, the Company's capacity expansion this year is as scheduled.
In the fourth quarter, we will further accelerate the speed and intensity of capital expenditure execution and spare no effort to optimize procurement, logistics and installation to ensure that next year's production expansion will proceed as scheduled. New projects with a total design capacity of 240,000 wafers of 12-inch mature production lines in Beijing, Shenzhen and Shanghai have been announced already with the Shenzhen new project expected to reach production in the second half of next year.
[Foreign Language]
[Interpreted] With operation continuity basically stabilized, expansion continuing to progress, and sufficient electrical power assurance, the Company will continue to maintain growth momentum in the fourth quarter, with revenue expected to grow 11% to 13% sequentially and gross margin expected to range from 33% to 35%.
Full year revenue is expected to exceed $5.4 billion, representing annual growth of around 39%. Looking ahead to next year, we believe the overall market prosperity remains positive, and the Company's capacity shortage as compared to our customer demand is expected to continue through the end of next year. Building on this year's rapid growth, the company's revenue growth next year is expected to be no less than the industry average.
[Foreign Language]
[Interpreted] Finally, many thanks again to our employees, customers, suppliers, investors and the community for their trust and support. Thank you all.
[Foreign Language]
[Interpreted] Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Gao and Dr. Zhao. 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.
[Foreign Language] [Operator Instructions] First question comes from the line of Randy Abrams of Credit Suisse.
Okay. Yes. A good result. The first question on the fourth quarter guidance, if you could split out how you see the contribution from shipments and versus pricing? And also, if any product mix change, advanced node relative to mature node. And if you could address also gross margin with a pretty big sales improvement, it's improving about 1 point. Is there a factor maybe moderating the expansion relative to the sales growth?
Randy, thank you for the question. And regarding your points on the question, to first one, you like to see -- like us to give the breakdown of the revenue growth and how much comes from the capacity release and how much comes from the ASP change. And at this moment from our calculations, that we gave a similar forecast like last quarter. And definitely, the growth 11% to 13% of revenue comes from both the capacity expansion and the better mix of the products so that we can get better ASPs for the overall. And more or less just continue the trend of last quarter.
And the second, you'd like to know the gross margin, since we got 11% to 13% with the revenue growth, but the gross margin is flat or to 1% type of things. And basically, when we have more capacity release and get a better revenue, we also have the increase of the depreciation from the new equipment.
And there's just one quick follow-up on the first question. Just in terms of the pricing environment, with capacity full, how you see like-for-like pricing moving up? And then I'll ask a second question.
And just now I already say that the, currently, our capacity there is still a very big shortage to our suppliers. And definitely, we support the strategic customers' needs first. In the meantime, we can adjust the capacity to a better ASP market. And at this moment, we really have more platforms to cater to this kind of adjustments. And we move to no just full player type high margin, but also move to the even shorter capacity area and to support customers' need, like 28-nanometer, 40-nanometer, FinFET. And this kind of area, the ASP is better and also price probably is getting higher. And of course, our costs are also getting higher. And that's the mix of the results when we gave the forecast.
Okay. And the second question related, if you could give an initial view for 2022 capacity expansion for 12-inch and 8-inch, and you mentioned Shenzhen 40,000. Would that be the full 40,000 capacity? So if you could give a view and within 12-inch, is the focus more now -- it sounds like if I read FinFET and 28? Or will you still expand 40 to 90, the mature 12-inch?
Yes, Randy. More or less, we already gave the announcement for different projects like Shenzhen, Shanghai Linkong and Beijing new factories. And in the meantime, we also gave the forecast on the CapEx spending from last year to this year. We also gave the update on the release of the capacities for our FinFET fabs. Putting these kind of things together, next year just now, and we gave the updates that we believe our growth will be above the industrial average.
And this year, we mainly released the new item 12-inch capacity, just about 10,000 wafers we announced it before. We mainly make the full use of the capacity buildup for FinFET this year for the 15,000 wafers, they converted to build capacity to revenue to wafer running. And we also make full use of the available 12-inch in the mature nodes. A nice year based on the high pace that we already announced, based on the new projects announcements, we think that idea capacity growth will be larger than last year. And we will give the detailed break-down and real numbers in February next year.
Okay. Okay. And the final clarification on that, last words, you said capacity increase larger than this year? And then just the other clarification, what's your view on the industry growth number? I think UMC put out 12% as their foundry view, but if you have a view kind of relative to industry?
Yes, Randy, that's a very good question. We did a very thorough calculation with the available data. Our peers in the foundry industry, more or less announced their have had spending in the next couple of years. I also gave the hint with the price raising potential for next year. In the meantime, we also calculate whether they already have this year and last year and come out with the numbers that the capacity increase plus the potential ASP adjustments is around the low teens. And that's the number we use as the calculation when we say that our growth will be better than this.
Okay. And you said your capacity growth, just to clarify, will be higher than this year's capacity growth?
This year, this year, yes.
Next question comes from the line of Szeho Ng from China Renaissance.
[Foreign Language]
[Foreign Language]
Next question comes from the line of Leping Huang of Huatai Securities.
[Foreign Language]
[Foreign Language]
Next question comes from the line of Zhu Jin Song of Haitong.
[Foreign Language]
[Foreign Language]
Next question comes from the line of Andrew Lu from Sinolink Securities.
[Foreign Language]
[Foreign Language]
[Foreign Language] I would now like to hand the call back to Ms. Guo Guang Li for closing remarks.
[Foreign Language]
[Interpreted] Thank you for participating in today's conference call. Thank you for your trust and support.
[Foreign Language] This concludes SMIC's third 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.]