Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to Semiconductor Manufacturing International Corporation's Fourth Quarter 2017 Webcast Conference Call. Today's conference call is hosted by Dr. Haijun Zhao, Co-Chief Executive Officer; Dr. Mong Song Liang, Co-Chief Executive Officer; Dr. Yonggang Gao, Chief Financial Officer; and Mr. Tim Kuo, Director of Investor Relations.

Today's webcast conference call will be simultaneously streamed to 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. Thank you.

[Tim Kuo, executive]

Good morning, and good evening. Welcome to SMIC's Fourth Quarter 2017 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-CEOs, Dr. Zhao and Dr. Liang, will provide some business commentary. This will be followed by our Q&A session. 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 Events & Presentations 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 on Form 20-F filed with the United States Securities and Exchange Commission on April 27, 2017.

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 our listeners. First, I will highlight our 2017 full year unaudited results, which are based on submission of our unaudited quarterly results for the year of 2017, and our fourth quarter results and then give first quarter 2018 guidance.

Revenue in 2017 was $3.1 billion, a record high compared to $2.9 billion in 2016. Gross margin in 2017 was 23.9% compared to 29.2% in 2016. Profit for the period attributable to SMIC in 2017 was $180 million compared to $377 million in 2016. EBITDA reached record high of $1.12 billion in 2017 compared to $1.06 billion in 2016. 2017 CapEx for foundry operations were $2.46 billion, while CapEx for nonfoundry operations were $29.5 million. In the fourth quarter 2017, our revenue was $787 million, an increase of 2.3% quarter-over-quarter mainly due to the increase of wafers segment. Gross margin was 18.9%, mainly due to high depreciation, product mix change and price pressure. Non-GAAP operating expenses were $201 million. Profit for the period attributable to SMIC was $48 million, while noncontrolling interests were $49 million offset to SMIC's attributable profits mainly due to the recognition of R&D cost sharing by our Beijing JV.

Moving to the balance sheet. At the end of the fourth quarter of 2017, cash on hand, including other financial assets, were $2.5 billion compared to $1.7 billion at end of the previous quarter mainly due to proceeds received from issuance of shares and capital injection from noncontrolling parties. Gross debt to equity ratio was 49% and debt -- and net debt to equity ratio was 12%. In terms of cash flow, we generated $324 million of cash from operating activities in the fourth quarter.

Now looking ahead into the first quarter of 2018. Our revenue is guided to be up 7% to 9% quarter-over-quarter, mainly due to the recognition of approximately $150 million one-time technology licensing revenue. Gross margin is expected to range from 25% to 27%, mainly due to the previously mentioned technology licensing revenue, partially offset by low utilization rates, high depreciation and product mix change. Non-GAAP operating expenses are expected to range from $212 million to $218 million. Noncontrolling interests of our majority-owned subsidiaries are expected to range from positive $15 million to positive $17 million, which are losses to be borne by noncontrolling interests.

The planned 2018 CapEx for foundry operations are approximately $1.9 billion, of which approximately $0.5 billion are expected to be spent for expansion of capacity in our majority-owned Beijing JV, and $0.4 billion are expected to be spent for new projects in Tianjin. Others are mainly for equipment upgrade, facility construction and [ erect ]. The planned 2018 CapEx for nonfoundry operations are approximately $48 million, mainly for the construction of employees' living quarters. Our planned 2018 D&A is approximately $1.1 billion, midteen growth compared to previous year.

I will now hand the call over to Co-CEO Haijun for general market remarks.

[Haijun Zhao, executive]

Thank you, Yonggang, and a very happy lunar new year to all our listeners. Thank you for joining us.

Looking at 2017, we increased our annual revenue by 6.4% year-on-year, in line with the gross rate of the foundry industries in spite of the challenges over the high downstream inventory and the changing market environment. We also successfully ramped up our 28-nanometer technology portfolios and have seen more than 10% revenue contribution in the fourth quarter of last year. Meanwhile, we have contributed and reached our technology offerings to diversify our revenue streams. For example, our automotive and industrial revenue doubled in 2017 compared with previous year. In 2017, revenue from communications and consumer remained flattish, and computing grew by 46.1% year-on-year. While our constrained growth was mainly a result of a slow hand market -- handset market, mobile phone market, which continues to impact us now. By region, North America-based customer contributed to a majority of our growth, increasing by 44.5% year-on-year. Meanwhile, China customers remained flattish, and the European region declined 35%, which was also due to the mobile phone exposure.

The first quarter last year revenue and the gross margin were in line with our guidelines with moderate growth and a decline, respectively. Margin decline was mainly from the increased depreciation of our equipments and the pricing pressure.

Taking on the role of Co-CEO with Dr. Liang last year, we confronted changing market dynamics, and we began the process of refining our business, recalibrating our product mix and accelerating technology migration for our customers. Today, we are putting more efforts into our technology development so to ensure our future growth targets. Dr. Liang will later share more on our technology developments.

Looking forward into this year, 2018, we will continue to be confronted with increasing competition, pricing pressures and a slower growth of certain end markets. 2018 will also be challenging for our profitability given the changing market dynamics and as we introduce new fabs and adjust product mix to address the evolving market. Our customers, have been facing increasing competition, particularly in communications and consumer space, resulting in increased pricing pressure to ours. In this year of transition, with new target to grow annual revenue in line with the industry, high single-digits growth, we aim to maintain gross margin in the teens percentage level and a positive net profitability attributable to SMIC shareholders.

For 2018, foundry CapEx is at USD 1.9 billion, a decrease of $500 million compared to the last year, as we invest in equipment according to clarity of demand and the technology capability. In this year, we will adjust our product mix and procure facilities to accommodate expansion when these 2 requirements are met.

In this time of adjusting our product mix, we will not decrease our R&D activities. R&D expenses are targeted to maintain in the teens percentage, and the funding from the government for R&D projects will increase as well.

With the changes in market dynamics, we see customers migrating to more advanced nodes at a faster rate, and we need to adjust accordingly, especially in the digit logic market sector. As the largest and the most advanced Chinese foundry, we aim to be a world-class foundry with the scale and the technology to serve our customers in the mainstream market. We are also accelerating mature and advanced technology developments as well as building up key platforms under strategic partnerships. To address increasing competition and to be more effective in our capacity, we focus on key platforms, where SMIC is and can be competitive and are preferred foundry SoCs. We will work with our customers to better cater to their needs and win the market together. We have already pinpointed a number of key platforms to address, and today, I will highlight 2 of them: our NAND Flash platform and CMOS Image Sensor platform. These 2 platforms revenue to SMIC grew almost 70% last year compared with the year before. We continue to build on our platform strategy and seek to expand our customers' business.

We are working hard to implement this market adjustment strategy within the company, and we ask our stakeholders to stay tuned as we deliver key checkpoints on platform development and technology advancement.

SMIC is situated in China, the largest market for ICs, and we believe we can continue to benefit from the continued IC market growth in China. Revenue from China-based customer grew by 15% in both quarters compared with third quarter last year, and we continue to see growth from the region in this year. We recently announced the selling up of SMIC South, which is our joint venture in Shanghai with Shanghai IC Fund and the China IC Fund. Together, our joint venture partners will contribute funding for the capacity expansion and the R&D of advanced technologies. We trust we can capture large opportunities as we deliver our new growth strategies, and we believe our position as the foundry of choice in China will hold solid and grow stronger as we target to increase our scale and our market share in the markets.

To summarize, the year ahead of us will be very challenging for our business. However, with our Co-CEO structure under leadership, we have increasing confidence that we can execute on our strategies and deliver our operational and R&D results. SMIC is in a transition to lend to customers a fast technology migration in today's dynamic foundry environment. We have great opportunities in front of us, and I believe we have the right team to execute the acceleration of technology development to capture these prospects.

We have confidence that SMIC will emerge stronger, bigger and profitable. We appreciate your patience as we work to advance SMIC to a world-class company.

I will now turn the call over to our Co-CEO, Mong Song, for technology comments.

[Mong Song Liang, executive]

Thank you, Haijun, and thank you to everyone on the call for joining us. Since I joined SMIC, we intensely evaluate our strategy and R&D focus. With our position in China, we are given great opportunities. However, we have not captured this due to lack of technology readiness. In order to sustain in the long run, we must drive technology development and capture the large waves of opportunities brought forth in China. We must also enrich our mature technologies to address the continued demand for competitive offerings for diverse applications. My confidence in our team's ability to deliver technology has vastly increased compared to 4 months ago when I first joined. I'm encouraged by the quick result of increased employee discipline, efficiency and performance. In this past month, our team has increased the sense of ownership, accountability and urgency. I'm now confident in this team to deliver and even outperform the company's original R&D targets.

Let me update you on our FinFET technology development. Since on board, I have concentrated much effort on FinFET development, which is crucial for a wide of variety of advanced computing applications. We have revised our FinFET plan, have seen rapid improvements in device performance as well as the year and believe our FinFET solutions will be competitive.

In terms of our 28-nanometer platform, our manufacturing team has recently delivered faster-than-expected year improvements on 28-nanometer HKC. Meanwhile, our 28-nanometer HKC+ is on target to enter production in the second half of this year.

On mature technology platforms, we have focused various areas such as NOR Flash, CIS and power IC. We are building a competitive BCD power management IC platforms. Our team is executing on our road map of continued development of this platform to provide various levels of voltage, better performance and higher density solutions.

To conclude my remarks today, I have high expectations on SMIC, especially for our R&D team, and at the same time, I have great confidence that we will deliver. Furthermore, I'm confident in our team's capability to utilize this time to prepare, develop and recalibrate our technology to create greater value for the future. We have instilled discipline and a sense of urgency to execute, deliver and to exhibit our position as a world-class foundry.

We thank everyone here for your support, and we'll continue to update you in the coming quarter.

I will now hand the call back to Tim for the Q&A session of this call.

[Tim Kuo, executive]

Thank you, Dr. Liang. Today's Q&A will be hosted by our Co-CEOs, Dr. Zhao and Dr. Liang, and our CFO, Dr. Gao. I would now like to open up the call for Q&A. [Operator Instructions] 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'll start to follow up on the R&D discussion. If you could talk -- it sounds like some milestones coming through both on 28 and FinFET. Could you discuss the view on 28 through the transition period this year, as we move from PolySiON to HKC, how you expect 28 to progress? And then outlook, I guess, from this progress, when do you think we get the next wave or meaningful inflection of the HKC into high-volume production? And then following, if you have a latest view on FinFET, for your commercial ramp-up of FinFET?

[Haijun Zhao, executive]

Randy, thank you for the question. I'll answer the 28-nanometer technology first, and Mong Song will follow up with FinFET. As you know, for 28-nanometer, probably today I mentioned that we have a sweet start to go, and we're already successfully running the PolySiON for quite a couple of years. And this year, we also ramped up 28 HKC moat, and you know that in the fourth quarter, they did more than 10% contribution to our revenue, and the yield improvements are very encouraging, and we are quite close to the industrial performance, and in the [ DMV ] industrial average performance. And for the HKC+ nodes, we'll make it into the production readiness by the middle of this year. And as you know, this 28-nanometer, PolySiON, high-K metal gate nodes already are mature technology, and the pricing pressure is very high, and we see that ramping up this technology really no matter the challenge is on the gross margin. And we are balancing the total volumes of this technology ramp up with our target gross margin.

[Mong Song Liang, executive]

Okay. So I will comment a little bit about 14-nanometer progress. Since on board, we have concentrated much effort on FinFET development. I revised the FinFET plan and now we have demonstrated good device performance in the year, met our internal target quite well. My confidence in our team's ability to deliver technology has vastly increased compared to 4 months ago when I first joined. I'm now confident in this team to deliver and even outperform the company's original R&D target.

[Randy Abrams, analyst]

Okay. If I could follow up just on the 28, it reached above 10% of revenue. From this level, do you expect it to continue to sequentially ramp, or maybe if you can give a magnitude of increase, if it will, through the year? Or if there's any transition of FLP rolling off, and so could stabilize? If you could give that outlook on the revenue contribution.

[Haijun Zhao, executive]

Randy, as you know, we already have the customers here, and we already built up the capacity. But in the meantime, I also made up with the pricing pressure. So we will take a very cautious pace in increasing the capacity. And SMIC is a latecomer in this 28-nanometer node, and that's actually a good opportunity for SMIC to be able to offer this technology to cater to multiple platforms. For example, 14-nanometer and the NAND Flash, high-end NAND Flash and the 28-nanometer are compatible running in the same fab, so we do have the flexibility to adjust the loadings from different technology moat, 28, PolySiON, 28 HKC, 20 HKC+, NAND Flash and 14-nanometer loading and other applications. So to answer your questions, we'll maintain the customer needs. And in the meantime, we take a very moderate pace to maintain this capacity expansion.

[Operator]

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

[Leping Huang, analyst]

[Foreign Language] This is Leping Huang from CICC. I have a question to Dr. Liang. So what's the major change of the CICC -- SMIC after you joined the company and especially in R&D organization?

[Mong Song Liang, executive]

Okay. Dr. Huang, in order to have a breakthrough in the technology development ASAP, I made the organization more simple and complementary with more resources focused on essentials that can deliver good value-add and establish key technology milestones, make sure each member takes clear responsibilities and deliver promises on each target. I also revised the technology development [ cytology ] with faster learning cycle and more consolidated investments and resources in key platforms. Technology development should be orientated by customer product and take a higher production stage as you recalled. My confidence in our team's ability to deliver technology has vastly increased. I'm encouraged by the quick result of increased employee discipline, efficiency and performance in the past month. My team has -- our team has increased the sense of ownership, accountability and urgency. I'm now confident in this team to deliver and even outperform the company's original R&D targets.

[Leping Huang, analyst]

[Foreign Language] The second question from me is to Mr. Gao. So I noticed that SMIC and the Shanghai IC Fund inject total, I think, USD 3.5 billion to SMIC South. So what will be the timetable and the plan of these companies?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

Okay. So for this project, we call that SMIC South, and the overall funding for this program, the first -- so the first stage will be USD 5 billion, and the registered capital would be USD 3.5 billion. For SMIC, we will hold 50.1% of the shares and the IC Fund and the Shanghai IC Fund will hold 49.9%. There's 2 timetables for your reference. So for the end of June and the end of December of 2018, we will have injected capital for around USD 1 billion.

[Operator]

Your next question comes from the line of Steven Pelayo from HSBC.

[Steven Pelayo, analyst]

First of all, I guess a little clarification. Can you talk a little bit about what's behind the technology licensing? What exactly was sold? And your guidance for high single-digit revenue growth this year, does that include the technology licensing revenue? I guess if I backed out $150 million, maybe you're only guiding to about 3% revenue growth. Could you answer those 2 questions first?

[Haijun Zhao, executive]

Steven, thank you for the question. We've formed a joint venture with a partner, resulted to controlling rights and licensed our SMIC-owned specific niche technologies to the joint venture and -- to form a company. By doing that, we can fully leverage the local support and also the investments on such niche technologies in the past many years inside SMIC. And by doing the joint venture, we can make this company stronger and also help upgrade the local industry. In the meantime, we can gather resources to support our key essential platforms inside SMIC, and that's a very good opportunity for SMIC to do that. It's a new attempt for SMIC to fully utilize the investments on niche technologies in the future. And your second question?

[Steven Pelayo, analyst]

Well, still to clarify on that. I understand that technology licensing, you're selling technology. But what exactly is it for? Is it semiconductor design, manufacturing? Is it packaging related? Can you give us some more details behind that? And then my second question was just relative to your full year guidance of high single digits. Does it include this extra $150 million?

[Haijun Zhao, executive]

Okay. For this technology, that's a niche technology, ranging from a device and a process technology and manufacturing, all the way to the back end, it's another mainstream technology, it's a niche market. And that's the thing I can say at this moment. And yes. The answer to your question, yes. The whole year guidance for the revenue growth is including this license and income, yes.

[Steven Pelayo, analyst]

Okay. And then if I could just follow up with a quick one, I'll get back in the queue. On 28-nanometer, I guess I didn't catch a more concrete example. I understand that you're facing some pricing pressures there, you have some new technologies ramping. But in the fourth quarter this year, it looks like you did about USD 85 million, USD 90 million, maybe about $240 million for the total of 2017. What kind of growth rate do you think you're going to have in 28-nanometer in 2018? Or maybe what do you think a year ago -- a year from today, fourth quarter this year, do you think you're going to be doing $150 million, $200 million a quarter? Help me understand how much 28-nanometer can contribute in 2018?

[Haijun Zhao, executive]

Just now actually I mentioned that there will be that -- first things first, we already have the customer base. We already built up the capacity. But this capacity got the flexibility to running back and forth with 14-nanometers and other niche technology platforms, like I mentioned, the NAND Flash and the 14-nanometer loading type of things. Currently, we should say this way. 28-nanometer pricing got a great pressure, are no doubt attractive and impact our gross margin, and we have to balance the move for more production ratio for this 28-nanometer. So on the one hand side, we need to make sure that we satisfy the existing customers' requirements. In the meantime, we take a very cautious way to move ahead for further expansion and higher ratio. So we have to say that we maintain the current situation, in the meantime, waiting for better timing, and when we have a more diversified customer base and -- to make this technology nodes running production more healthily. And just now, I'll also mention that we will have the HKC+ coming into the production stage in the middle of this year.

[Operator]

Your next question comes from the line of Charlie Chan from Morgan Stanley.

[Charlie Chan, analyst]

So first question, I guess, is to Dr. Liang. You mentioned that the company seems to miss some opportunities from the China semiconductor demand because of the readiness of technology. So I guess part of it could be like bitcoin ASIC because they're used mostly in HR technology, right? So besides bitcoin ASICs, what kind of opportunities the company should capture but you didn't get it because of technology issue? Can you clarify?

[Mong Song Liang, executive]

Okay. We target the 14-nanometer FinFET technology in variety of applications, but mainly focused on high computing and low power segments.

[Charlie Chan, analyst]

Okay. So besides the 14-nanometer, what kind of business opportunity you didn't capture? I mean, for those 28-nanometer or turn edge, for example, what semiconductor products you think you should monetize, but you don't have the technology? Because from there, we can understand your milestone and at what points you can reassess your top line growth?

[Mong Song Liang, executive]

That actually is quite a complicated question. But to make it simple, since the semiconductor business and application are dynamic because they're changing recently, for SMIC, we target our technology road map from HKC, HKC+ to the FinFET, and this kind of technology migration, we hope to catch most of the consumer and not only the mobile application and other noncore sensitive applications here.

[Charlie Chan, analyst]

Okay. So I guess my next question is regarding your 8-inch fab utilization because some of your industry peers, like Vanguard, UMC, are saying that 8-inch fab is a pretty full. So what is your fab utilization for 8-inch? And I was thinking those fab pure business like a NOR Flash, CMOS image sensor can help your utilization in 1Q, but it seems like first quarter is still quite tough, right? So can you give us some color on your 8-inch fab business now?

[Mong Song Liang, executive]

Yes, I will refer this question to Dr. Zhao.

[Haijun Zhao, executive]

Okay. Charlie, for our 8-inch capacity, and this kind of forecast, overall we should say very good. And -- but you do see the forecast utilization for SMIC overall, we do not forecast that high, mainly because for 8-inch, we also have the new wafer fab. You know that we announced we'll build a new wafer fab in Shenzhen, that's a brand-new fab. And for that fab, they need time to qualify the existing platforms, existing customer product portfolios. So that fab, while it is ramping up, the full -- the utilization is not as good as the others. It's expected, and everything is in line with our forecasting for that 8-inch fab, but overall we should say SMIC 8-inch overall utilization is very good. Another thing I can share with you is that SMIC, from a historical point of view, we built up 8-inch 0.11 to 0.13 micron copper capacity in order to satisfy customers' needs. But we see the technology transition from 0.11, 0.3 -- 0.13 technology shift to signify 55-nanometer copper technologies. And so we do convert this copper capacity into aluminum capacity, and that also takes the time of transition, but overall, we have the demand there, yes.

[Operator]

Your next question comes from the line of Rex Wu from Jefferies.

[Rex Wu, analyst]

So I just have one question about the 14-nanometer. So when we have -- so once SMIC fully ramped the technology, likely it will be kind of like a mature technology again. So can management explain a little bit like what's the competitive edge for SMIC's 14-nanometer platform?

[Mong Song Liang, executive]

As a latecomer in the market, we are using the most advanced tools. We can provide the industry competitive 14-nanometer solution based on customers' latest request with high performance and lower process cost. We will provide customers with easy migration, various device integration and full IP coverage, and we target its production will start in the first half next year.

[Operator]

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

[Rick Hsu, analyst]

I've got a question on your first quarter gross margin guidance. Does this 25% to 27% include the license revenue? So what is the apples-to-apples? If we exclude this license revenue, what would be your gross margin guidance for Q1?

[Haijun Zhao, executive]

Rick, thank you for the question. Excluding this -- you mentioned this license income from the joint venture, kind of apple-to-apple to the first quarter last -- third quarter last year, and for the first quarter, we should say we target 10% to 12% of gross margin.

[Rick Hsu, analyst]

10% to 12%?

[Haijun Zhao, executive]

Yes.

[Rick Hsu, analyst]

And the second question, I think Yonggang ran through this year's CapEx $1.9 billion breakdown, but I kind of missed this breakdown. Can you restate the breakdown again for this year's CapEx?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

Okay. So the planned 2018 capital expenditures for foundry operations are approximately $1.9 billion, around 42% is for facility CapEx, mainly for our Shanghai and Tianjin new fab. The rest is mainly for equipment, like our Beijing JV advanced nodes expansion and upgradation tools, and those are our Shanghai R&D tools.

[Operator]

Your next question comes from the line of Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

I just wanted to ask about the price pressure that you're seeing in 28-nanometer. What is your outlook for overall 28-nanometer once you kick in HKC and HKC+ towards the end of the year? Do you feel that the pricing will get better? Or like any mature node, I think the pricing just keeps declining once the node becomes a certain level of maturity. That's my first question. Second, is on your progress on the leasing of assets instead of investing in CapEx. I think 2017 already -- it feels like you have used a significant amount of leasing provisions on equipment. Could you talk about the application of this technique for 2018 as well? And it seems like it has not really changed the growth in depreciation. So should we expect that depreciation growth is still going to be pretty high even if you are using significant amount of leasing provisions on the CapEx side?

[Haijun Zhao, executive]

Gokul, thank you for the question. For pricing pressure on 28-nanometer node, we believe we also said the reasons are 28-nanometer these days still cater to the major consumer applications and the communications sector, and that sector still maintains -- very competitive. And because the end market is so competitive, this kind of pressure's transferred to the foundry suppliers. We believe they will be there. For SMIC, on the one hand side, just now we said that we'll maintain to meet customers' requirement. We already have the customer demands there. We already built out the capacity. We'll maintain running at this kind of capacity to meet our requirements. In the meantime, we improved our yield and lowered our manufacturing cost. And then we also delivered new platforms to be more competitive. Just now we mentioned that by the end of -- by the middle of this year, we'll deliver the readiness of C+ platforms. And then we'll wait for more customers come in and see a better opportunity to ramp up further. So that's a very cautious way, we keep emphasizing that we're balancing the volume of running 28-nanometer and raise the target in gross margins for all of SMIC. And so we keep -- have the adjustment by compose. And for the build capacity, just like I mentioned, we do have the flexibility to running through different technology nodes and different platforms. So we can adjust that.

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

Okay. So Gokul, for this year, actually, there's no management leasing program so far. For last year, the total management leasing came up with USD 885 million. So according to this leasing program, actually, we save our D&A by USD 26 million.

[Yonggang Gao, executive]

In 2018.

[Tim Kuo, executive]

In 2018.

[Operator]

Your next question comes from the line of Bill Lu from UBS.

[William Lu, analyst]

Two questions. Management talked about risk production for 14-nanometers in the first half of 2019. Can you talk about what that means for capital spending? When do you have to start spending for 14-nanometers? I'm just wondering, if you look at this year's CapEx is down from 2017, should we model a ramp in 2019? Or can you do a small length start?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

Okay, Bill. So actually, as we announced our SMIC South project, it's particularly designed for our 14-nanometer FinFET fab. So actually our target for 2018 is to complete all the shelves and the clean room set up. And so for 2019, the CapEx are primarily for our equipment CapEx. But so far, we don't have a clear time line for all these stuffs.

[William Lu, analyst]

Okay. So without giving me a CapEx number for 2019, can you help me a little bit with how much capacity you will have for 14 nanometers in 2019?

[Haijun Zhao, executive]

Bill, we have the R&D facilities at this moment that's reached a certain type of capacity number already at this moment. And at the first stage for any fab, we'll use the image scanners quantity to define the pace. So that will be roughly about 3,500 wafers per month, 6,000 wafers per month and a goal for 9,000 wafers per month. That will be 3 stage. At this moment, we do have 3.5K per month capacity for R&D.

[William Lu, analyst]

Great. Can I just follow-up on Gokul's question? If you look at the pricing pressure on 28 nanometers, is it just as severe for HKC as it is for Poly? Or are you seeing a difference?

[Haijun Zhao, executive]

Actually we see them on both. On PolySiON, it's a relatively simple version. They have a fewer layers in the whole process, and high-K metal gate, they have more process layers. But overall per layer, we saw similar things. So the pressure -- to your questions, the pressure is actually on both platforms. That's the market. That's the market overall, not specific to SMIC. I really believe that we are running market.

[Operator]

Your next question comes from the line of Roland Shu from Citigroup.

[Roland Shu, analyst]

First question is for your first quarter gross margin guidance. If you could, at least, one, technology license revenue you said will be about 10% to 12%. So we know at least the problems are due to this lower utilization and product mix change and even from the higher depreciation. So I would like to know how high the depreciation would be for this first quarter gross margin -- lower first quarter gross margin, so on a depreciation point of view?

[Haijun Zhao, executive]

On the first quarter, we see 6% more depreciation added to the cost. Without this, I don't -- you can't -- we can use it to calculate what the gross margin should be given the facts.

[Roland Shu, analyst]

6% higher depreciation means that the absolute dollar amount compared to 4Q.

[Haijun Zhao, executive]

Compared with the current quarter, yes.

[Roland Shu, analyst]

Okay. How about the full year, the whole year 2018, depreciation will be?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

So for the whole year, the overall depreciation will increase around 15% compared to 2017.

[Roland Shu, analyst]

Okay. And Haijun said the whole year 2018 gross margin target will be above the teens percentage point. So would like to know, is this low teens, midteens or high teens?

[Haijun Zhao, executive]

Actually, at this moment, we do not have the good visibility for the whole year, and we cannot say very confidently for the detailed numbers and...

[Roland Shu, analyst]

But what -- is it more close to first quarter gross margin, or it will be better than first quarter gross margin?

[Haijun Zhao, executive]

Of course, we hope that quarter by quarter, it's getting better and better, yes.

[Roland Shu, analyst]

Okay, cool. Second question, your auto and industrial revenue actually doubled last year. How about this year? Will it also about to be double again? And also, how about your NAND Flash and CMOS image sensor revenue contribution last year and also your expectation for this year?

[Haijun Zhao, executive]

Definitely grow. And well, we do not have -- I do not have exactly the calculation there, whether or not we'll double again, that will be a significant increase in the revenue -- of the revenue from these 2 platforms. And you know on other things that we do not comment too much on a single product, but definitely grow further.

[Operator]

That's all the time we have for question-and-answer session. 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 you, everyone, 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 quarter earnings call. We thank you for joining us today.