Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2022-Q3

[Operator]

[Interpreted] Welcome to Semiconductor Manufacturing International Corporation's Third Quarter 2022 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, Board Secretary to host the webcast.

[Guang Li Guo, executive]

[Interpreted] Greetings. Welcome to SMIC's Third Quarter 2022 Webcast Conference Call. Attending today's call are Dr. Gao Yonggang, Chairman; Dr. Zhao Haijun, Co-Chief Executive Officer; and Dr. [indiscernible], Senior Vice President.

Let me remind you that today's presentation may contain forward-looking statements that do not guarantee future performance where we present 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.

I will now hand the call to Dr. [indiscernible] to introduce the company's financial status.

[Unknown Executive]

[Interpreted] Hi. I will report our unaudited financial results for the third quarter, followed by our guidance for the fourth quarter and full year.

The third quarter's financial results are as follows. Revenue was CNY 1,907 million, up 0.2% sequentially and 34.7% year-over-year. Gross margin was 38.9%, down 0.5 percentage points sequentially and up 5.8 percentage points year-over-year. Profit from operations was CNY 478 million, down [Technical Difficulty]

[Operator]

Please remain on the line, your conference will resume shortly.

Thank you all for staying. We will now resume the call.

[Unknown Executive]

Sorry. We're back to the line. We can start now.

[Unknown Executive]

Profit from operation was CNY 478 million, down 11.4% sequentially and up 54.1% year-over-year. EBITDA was CNY 1,192 million, down 2.3% sequentially and up 33.3% year-over-year. Profit attributable to the company and noncontrolling interest were CNY 471 million and CNY 104 million, respectively.

Moving to the balance sheet. At the end of the third quarter, the company had total assets of $41.8 billion, of which total cash in hand was CNY 18.4 billion. Total liabilities were CNY 13.9 billion, of which total debt was CNY 8 billion. Total equity was CNY 27.9 billion. total debt-to-equity was 28.6% and net debt to equity was negative 37.4%.

In terms of cash flow, in the third quarter, we generated CNY 1,069 million cash from operating activities. Net cash used in investing activity was CNY 3,024 million. Net cash from financing activities was CNY 1,063 million.

Above the company's financial results for the third quarter for the fourth quarter and the full year, our guidance and outlook are as follows: -- in the fourth quarter, revenue is expected to be down 13% to 15% sequentially, and gross margin is expected to be in the range of 30% to 32%. And -- according to the result of the previous 3 quarters and the midpoint of guidance for the fourth quarter, the company's full year revenue is expected to be around CNY 7.3 billion, up around 34% year-over-year, and the gross margin is expected to be around 38%.

Our capital expenditure plan for this year is raised from CNY 5 billion to CNY 6.6 billion. Depreciation and amortization for the full year is expected to be approximately CNY 2.3 billion. This concludes the financial status. Thank you.

[Unknown Executive]

Thank you, Dr. [indiscernible]. Next I will hand the call to Dr. Zhao Haijun to comment on market operations and technology platforms.

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Interpreted] Hello, everyone, and thank you for attending the third quarter earnings webcast.

In the second half of 2022 from the perspective of macro environment, the soft consumer demand, global energy crisis caused by international local conflicts, high inflation, currency fluctuation, et cetera, have led to weak global economic recovery. Overlapping with the new export control rules issued by the United States, these multiple factors have brought varying degrees of changes and challenges to the global and regional industry chain.

The system and distribution for the division of industry are undergoing profound adjustments -- the original circulation of global ecosystems has been interfered or even disrupted and the process of regionalization is advancing with difficulties. From the perspective of the industry cycle, destocking pace of smartphones and consumer electronics is low. Customers' willingness to tape out is not strong. The industrial controllers area is relatively stable, but with limited growth.

The automotive area is resilient in terms of and consumption and demand the outstrip capacity in the industry. In such an environment, the company adhered to the tactics of dynamic adjustment of customers, products and capacity. Although the performance was inevitably affected the company achieved its target for the third quarter with the efforts of all employees.

The third quarter's revenue was CNY 1,907 million, with a slight decrease in shipments and a small increase in blended ASP due to product mix optimization. Therefore, the revenue remained flat comparing to the previous quarter. By geography, revenue from Chinese Mainland and Hong Kong, China accounted for 70%. North America, Europe and Asia in total accounted for 30%. Wafer revenue by application, smartphone, smart home, consumer electronics and others accounted for 26%, 15%, 23% and 36%, respectively.

Although the overall mobile phone area was still destocking, thanks to the company's direct communication with end customers, we started to adjust capacity allocation in advance since next year, reducing the capacity plan in relative saturated segments. Thus, smartphone's revenue contribution increased slightly in the third quarter sequentially. The overall demand for consumer electronics was weak, with 4% sequential decrease in revenue in the third quarter.

Although overall revenue of Smart Home decreased by 9% sequentially. The demand for local area network application remains strong, with 22% increase in revenue sequentially. Revenue from others increased by 2% sequentially. -- among which power growth and automation increased by around 30% sequentially.

Revenue from IoT increased by around 20% sequentially, driven by the wearable devices, by size, wafer revenue for 8-inch and 12-inch accounted for 32% and 68%, respectively. Overall, the scale and structure of revenue in the third quarter was largely consistent with the second quarter.

In the third quarter, externally, demand decline of some products and internally, some fact conducted annual maintenance while the monthly capacity increased by 32,000 8-inch equivalent wafers this quarter. Thus, the capacity utilization was 92.1%, down 5 percentage points from the previous quarter. Combining the above factors, gross margin for the third quarter was 38.9%, down 0.5 percentage points sequentially.

Our fourth quarter guidance is as follows: due to the weak demand in mobile phone and consumer, overlapping with the impact from that some customers need time to interpret the newly released U.S. export control rules Revenue is expected to decline by 13% to 15% sequentially with gross margin in the range of 30% to 32%. According to the results of the previous 3 quarters and the midpoint of guidance for the fourth quarter, the company's full year revenue is expected to be around CNY 7.3 billion, up around 34% year-over-year, and gross margin is expected to be around 38%.

In terms of capital expenditure, we have CNY 4.4 billion expenditure in the first 3 quarters, and increased 85,000 8-inch equivalent monthly capacity. The company has always adhered to the consistent principle of prudent planning and conduct medium- and long-term capital expenditure planning according to the long-term market demand. The schedule may be adjusted appropriately according to the market conditions, procurement cycle time and other reasons. Together with the new project of SMIC [indiscernible] announced in the third quarter, SMIC has 12-inch new production line projects in Shenzhen, [indiscernible], Lingang and [indiscernible] for the next 5 to 7 years, with total around 340,000 12-inch monthly capacity. Considering the long-term arrangements for these projects, the company needs to prepare for those equipment with long lead time in advance. Therefore, the capital expenditure plan this year is revised upwards from CNY 5 billion to CNY 6.6 billion.

During the earnings call of previous quarter, we expected the cycle adjustment will last and later the first half of next year. Based on the current macroeconomic trends and the pace of destocking, we have yet to see signs of recovery in the industry. There is a time lag in the transmission of its impact from the end market to the foundry industry, and the foundry industry cycle has not yet bottomed out.

Facing the current complex environment and influencing factors based on the characteristics of our customers and product structure internally, we streamline, reveal and optimize our technology platform, product portfolio, capacity and equipment mix and staffing allocation to improve the efficiency of our production.

Meanwhile, we prepare for the iteration of new and existing products in terms of research and development, supporting service and capacity. -- debottleneck production and accelerate the tape-out and output of iteration products. Externally, we refined our marketing tactics, research and evaluation, deepening customer service, look for opportunities for differentiation so as to retain existing customers to iterate products and attract new customers to tape out in SMIC, reserving certain iteration time, gaining momentum and waiting for the industry cycle to rebound.

In addition to the industry cycle factor, the United States has recently updated and revised its export control route for a new round of restrictions on China IC industry. According to our preliminary interpretation, the new rules have an adverse impact on our production and operations. We have maintained close communication with suppliers and customers, while the clarification of some definitions in the new rules and the assessment of impact on the company are still in progress.

Since its establishment 22 years ago, SMIC has experienced the ups and downs of many cycles as well as many difficulties. The adjustment may last longer as this cycle is overlaid with multiple complex external factors. The development of the company is inseparable from seeing the momentum when the industry is booming and even more inseparable from persistence and patients when the industry is going through a difficult time. In the phase of a severe situation, we're still full of confidence in the company's medium to long-term development.

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

[Unknown Executive]

Thank you, Dr. Zhao. Next, is our Q&A session. Questions will be answered by Dr. Zhao and Dr. Guo. Chinese question 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] Your first question comes from the line of Randy Abrams from Credit Suisse.

[Randy Abrams, analyst]

Okay. Yes. I appreciate the work you're doing, managing through everything. The first question on the capital spending, 2 parts. First, if you could talk about the motivation to accelerate the prepayments given the slowdown in the industry. And if this is tied to areas like long lead time tools like lithography. And then the second part is just with the pull-ins, what is the initial view on 2023 CapEx and your planned expansion for 8-inch and 12-inch with that spending.

[Unknown Executive]

Randy, thank you for raising the first question. To answer your question, the first one for the long delivery cycles of the equipment they put down payments there. That's the reason this year we reached the CapEx from USD 5 billion to 6.6. And this kind of machine, no jobs for the long delivery tools you mentioned lithography, but also includes some tools and the supplier side is relatively small.

So they have the overwhelming orders. They take a very long time to shape the machine. So we have to put down payments there and to secure the supply of these type of machines. If you notice -- just now I mentioned a number for the last 5 to 7 years, altogether, we have 5 new projects and to reach about 340,000 wafer per month 12-inch capacity. That's a very big scale. But the time also takes 5 to 7 years to complete. And we have to make sure that different fishing for different technologies to serve different customers so they have different 2 types to get in on the schedule and to secure that power, we have to reach this CapEx for the down payments.

And second thing, you mentioned that for next year was roughly about this [indiscernible] for 8-inch. And we have the regular type of increments of 8-inch capacity major to satisfied industry growth. And last year, 2021, operated about 40,000 wafers per month for 8-inch. This year, we have the similar type of incremental capacity. And next year, I believe we have the similar type. For 8-inch, there is a mature industry, but they also have the growth there. They have the continued growth from our customers and the Chinese market.

[Randy Abrams, analyst]

Okay. And actually, for the CapEx, do you have the 12-inch expansion for this year and next year and your first view on CapEx for 2023?

[Unknown Executive]

Okay. For this year, Randy, we mentioned that more or less we have 40,000 wafers type of 8-inch -- and reminding is the 5 billion [indiscernible] 40,000 wafer test 12-inch. At the beginning of this year, we announced that the 12-inch capacity increment is same or higher than last year. And we haven't reached the final year and the fourth quarter, we'll have a lot of machines coming.

[Randy Abrams, analyst]

Okay. And any plan or rough view next year a similar amount or higher, lower?

[Unknown Executive]

Nice year, and we announced the different projects sequentially. So next year, the major side will be our Beijing new wafer fab, the new sites and the Shenzen wafer fab, a 12-inch and 8-inch roughly the same size of this year for incremental capacity.

[Randy Abrams, analyst]

Okay. Just to clarify, is 12-inch roughly the same size and because the prepayment took up this year level, is the right baseline $5 billion or it's more next year, maybe similar like $6.5 million or $6.6 billion?

[Unknown Executive]

We haven't guided the finalized schedule for the shipment yet. Basically, we hope that -- the wafer 5, you set up that manufacturing facility, you will run it for 20 to more than 20 years. So that year is the downturn or the upturn, it's not that important for the specific side. And the important thing is SMIC around 5 to be built up in different years. So next year, we will just have this type of average growth for the 5 to 7 years. So next year, if everything on scheduled, I believe, more like they have the similar growth of this year.

[Randy Abrams, analyst]

Okay. No, that's helpful. And just a second question. I wanted to ask about your sales outlook. So fourth quarter, if you could go through the different applications because it looks like smartphone maybe -- or just if you could go through the application. And then how -- what type of utilization drop you're seeing into first quarter at this stage? If you see the rate of decline, a similar pace or any moderation or stabilization.

[Unknown Executive]

Randy, very difficult to give you the exact...

[Operator]

Please stay on the line. Your conference will resume shortly...

[Unknown Executive]

We are back to the line.

[Operator]

Thank you. Please continue.

[Unknown Executive]

Randy, are you there?

[Randy Abrams, analyst]

Yes, I'm here.

[Unknown Executive]

I apologize for the interruption. And just now we come to the point that we could not give the exact numbers of the finalized utilization. And -- but we already include that factor into our revenue guidance and the gross margin and the drop of gross margin, mainly from the loss of the utilization and the phasing of new depreciations. And just now during our statement for the third quarter, we gave one information that we are working very closely with our customers to clarify the impact of the new guidelines from your U.S. government. And that part also like the impacts because some customers hesitate at this moment. And we need to settle down exactly the wafer loading these type of things, but lower than the third quarter, 92% definitely.

[Randy Abrams, analyst]

Okay. And have you quantified or about how much the impact on the part where you're working with customers like just that part because there's the demand impact, but is there kind of a part that's the impact of that.

[Unknown Executive]

We could not get the exact number at this moment, but we just found that that impacts the international markets, not just to the [indiscernible] not technology things, the international market like the computing things that market get a very, very big impact at this moment and customers are very hesitate on the further inventory for that market. We do not know exactly what's the impact to the market. My personal guiding is maybe 30% of the overall market for this kind of [indiscernible] type of things, the not export it to China market. So they have this kind of a splash to the overseas market. And when this kind of industry, they cut down the demand and some customers, even though they're not enough in mature technologies, they also need to take cautions that they do not overbuild the inventory. And this kind of thing impacts affect quite mining customers, even though they are major products are sitting overseas, not necessary to the Chinese market.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Operator]

Thank you for your questions. I'll handover the call to [indiscernible] for closing remarks.

[Unknown Executive]

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

[Operator]

This concludes SMIC's Third Quarter Webcast Conference Call. We thank you for joining us today. The conference will begin shortly.