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Semiconductor Manufacturing International Corp
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[Foreign Language] Welcome to Semiconductor Manufacturing International Corporation Fourth Quarter 2020 Webcast Conference Call. Today's call will be live streamed through the Internet at SMIC website. Webcast playback will also be available approximately 1 hour after the event. [Operator Instructions] However, at the conclusion of the management presentation, we will have a question-and-answer session, at which time you will receive instruction on how to participate. 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. Thank you.
[Foreign Language] Greetings. Welcome to SMIC's Fourth Quarter 2020 Earnings Call. Today's call is hosted by Dr. Zhao Hai Jun, Co-Chief Executive Officer; and Dr. Gao Yonggang, Chief Financial Officer. The call will last about 60 minutes. The management will provide their commentary in Chinese, and Investor Relations team will provide English interpretation in parallel. 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 -- 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 press release.
Today's earnings statement use International Financial Reporting Standards, IFRS, but we will also reference financial measures that do not conform to IFRS in order to help investors compare SMIC's past performance. These non-IFRS measures may differ from similar data presented by other companies. Please refer to the tables in our press release. Please note that all currency figures are in U.S. dollars, unless otherwise stated.
I will now hand the call to CFO, Dr. Gao Yonggang, for financial highlights and guidance.
[Foreign Language]
[Interpreted] Greetings to all. Please be reminded that all earnings figures are prepared in accordance with IFRS, unless otherwise stated. First, I will highlight our fourth quarter and 2020 unaudited results and then give the first quarter and 2021 guidance.
[Foreign Language]
[Interpreted] Fourth quarter 2020 revenue was $981 million, an increase of 16.9% year-over-year and a decrease of 9.4% sequentially, mainly because, one, decrease in FinFET wafer shipments; two, decrease in other revenue. Gross margin was 18%, sequentially down mainly due to, one, revenue mix change; two, FinFET utilization relatively low, so overall utilization rate down to 95.5%. Profit for the period attributable to SMIC was $257 million, a record high, partly due to investment gains from associated companies. Noncontrolling interests were $28 million, which are losses borne by noncontrolling interest.
[Foreign Language]
[Interpreted] Moving to the balance sheet. At the end of the fourth quarter, total cash on hand was close to $15 billion, total assets were close to $31.3 billion, and total equity was around $21.7 billion, including noncontrolling interest. Gross debt-to-equity was 29.4%, and net debt-to-equity was negative 39.6%. Accounts receivable turnover was 41 days, and inventory turnover was 89 days.
[Foreign Language]
[Interpreted] In terms of cash flow in the fourth quarter, we generated $534 million of cash from operating activities, a sequential down, partly due to changes in working capital.
[Foreign Language]
[Interpreted] Based on fourth quarter results, I will summarize unaudited 2020 results. The company's key financial metrics significantly increased as compared to that of 2019. Revenue in 2020 was $3,907 million, an increase of 25.4%, mainly attributable to increased shipments and ASP from product mix optimization. Gross profit was $921 million, an increase of 43.3%. Gross margin was 23.6%, an increase of 3 percentage points, mainly due to increased utilization and ASP from product mix optimization.
Profit for the period attributable to SMIC was $716 million, an increase of 204.9% due to improved operating profit and other investment gains. EBITDA was $2,123 million, an increase of 54.6%. Of the above, SMIC reached record highs for revenue, gross profit, profit for the period attributable to SMIC and EBITDA.
[Foreign Language]
[Interpreted] Now for the first quarter, our guidance is as follows. Revenue is expected to grow 7% to 9% sequentially, mainly due to strong customer demand for non-FinFET process. Gross margin is expected to range from 17% to 19%, using the midpoint is sequentially flat. Non-IFRS OpEx is not expected to differ much from the fourth quarter, while losses to be borne by noncontrolling interests are expected to increase substantially quarter-over-quarter.
[Foreign Language]
[Interpreted] Looking to 2021. As SMIC was placed on the U.S. Entity List, the company is restricted from procuring related U.S. items or technology, so there are risks and uncertainties to our annual forecast. The forecast we give today assumes that operational continuity is not significantly adversely affected. Export license application processes must be followed. They take time and will face uncertainty.
Based on the above, our targets and plan for 2021 are as follows. Our revenue target is mid- to high single-digit percentage growth. Revenue target for first half is around $2.1 billion. Our annual gross margin target is in the mid-teens range. SMIC sales negative impact to company's overall gross margin this year is estimated to be around 10 percentage points. CapEx of $4.3 billion, majority is for non-FinFET capacity expansion and remaining for FinFET, the infrastructure of the new Beijing JV project and et cetera. Annual depreciation and amortization is estimated to be roughly $2 billion. And EBITDA is expected to be around $2.3 billion.
[Foreign Language]
[Interpreted] Lastly, I will address the termination of our American depository receipt. In 2019, our ADRs were delisted from the New York Stock Exchange. Considering that current ADR shares are less than 0.3% of total outstanding shares and participation is low, SMIC has initiate termination of our ADR program on January 31 this year and is executing procedures in accordance with relevant regulations.
This concludes our financial remarks. Thank you.
[Foreign Language]
[Interpreted] Thank you, Dr. Gao, for the financial update. I will now hand the call to our co-CEO, Dr. Zhao Hai Jun, to comment on market, company operations and technology platforms.
[Foreign Language]
[Interpreted] Thank you all for joining us. 2020 has been hot and cold for the IT industry. On the one hand, the stay-at-home economy brought by the epidemic has strengthened people's demand for the Internet of Everything, and the consumption of chips had far exceeded expectations. Semiconductor companies in various countries met rare market opportunities.
On the other hand, due to geopolitical factors causing turbulence, upstream and downstream, causing interruptions for global semiconductor companies' business and affecting innovation and development of the industry.
[Foreign Language]
[Interpreted] 2020 was SMIC's 20th anniversary. Since its inception, SMIC strictly operates in compliance with the laws and regulations. After 20 years of independent technology development, market expansion, capacity building and the talent training, the company could have seized this year's rare market opportunity and achieved rapid growth. However, due to impact of external factors, we were forced to adjust customer mix and capacity composition. These adjustments caused additional costs.
[Foreign Language]
[Interpreted] Nevertheless, with the active support of our customers, suppliers and industry partners and investors and through the [ unrelenting ] efforts of all employees, revenue in the fourth quarter was $981 million. Although it was down 9.4% sequentially, it increased 16.9% year-over-year and was our second-highest quarter in history. Last year, the company achieved [ hard-won ] unaudited annual revenue of over $3.9 billion, an increase of 25% year-over-year. We sincerely appreciate everyone's efforts.
[Foreign Language]
[Interpreted] Now let me provide an update on non-FinFET technology. In the past few years, SMIC worked on product platforms such as power management, auto low power, radio frequency, image sensors, fingerprint recognition and specialty memory, especially on 0.15, 0.18 micron, 65-, 55-, 45-, 40-nano, et cetera. All these reached industry-leading standards.
We also achieved the interconversion of 8-inch and 12-inch for 0.13 micron copper and 0.15, 0.18 micron aluminum processes. [ This market ] competitiveness in terms of quality and customer service and have expanded the company's profitability. Our MCU and high-voltage driver IC output also continues to grow.
[Foreign Language]
[Interpreted] Currently, the worldwide foundry capacity is still tight. On one hand, demand is increasing, and on the other hand, capacity expansion cannot keep up. Last year, SMIC expanded around 30,000 wafers per month to our 8-inch fab in Tianjin and 20,000 wafers per month to our 12-inch fab in Beijing for 28-nano and above nodes but did not meet the growing customer demand.
[Foreign Language]
[Interpreted] Given the impact of being added to the U.S. Entity List, uncertainties exist in 2021 operations. I would like to address two points for 2021.
First, we continue to be fully loaded for non-FinFET processes. Therefore, company revenue is expected to return to more than $1 billion in the first quarter. Second, production continues to expand as we increase monthly capacity by 10,000 for 12-inch and no less than 45,000 for 8-inch. Due to longer lead times for equipment procurement, however, most equipment will not be in place until the second half of this year. So it will not contribute much to this year's revenue. The annual revenue growth is expected to be in the mid- to high single digits. We hope that the company's production capacity of 28-nano and above nodes will increase steadily in the next few years and maintain a certain level of profitability while expanding capacity.
[Foreign Language]
[Interpreted] As for FinFET technology, after 3 years of development, it has achieved good results. Our own platform process technology and risk production, but under the influence of external factors, FinFET utilization is relatively low since fourth quarter of last year. Ramp-up takes time. Revenue contribution has fallen short of expectations, and depreciation places a burden on the company's overall profitability.
[Foreign Language]
[Interpreted] For 2021, our thoughts on FinFET technology are as follows.
First, to ensure the continuity of production, we will continue work to apply for export licenses with our suppliers.
Second, to carefully expand capacity. At the end of last year, we reached our target of 15,000 wafers per month installed FinFET capacity as planned, but it is still far from economies of scale. If further expansion is needed, export license application process is required.
Third, we will consider strengthening the development and deployment of our first- and second-generation FinFET multi-platform and expand the reliability and competitiveness of our platforms.
[Foreign Language]
[Interpreted] Overall, the company's growth in 2021 will still be affected by external sanctions. Future uncertainties still exist, and potential risks are not completely eliminated. Without these influences, SMIC could have maintained last year's rapid growth momentum. Although we cannot control external forces, we will cultivate new possibilities and opportunities in the face of crisis and changes. We will continue to try our best to sustain and will not change our goal to serve global customers.
[Foreign Language]
[Interpreted] In the long run, the international semi ecosystem has undergone tremendous changes in recent years. And Moore's Law, which has supported a strong development of electronics for decades, has approached physical limits. With the advent of the post smartphone era, market requirements for chips have also diversified. There are many types of chips and great changes.
Facing the opportunity of supply chain reorganization, we should try and innovate to combine our strengths and unique characteristics to explore a sustainable development path that is more suitable for SMIC.
[Foreign Language]
[Interpreted] Lastly, I wish you all a happy Chinese New Year. Thank you all.
[Foreign Language]
[Interpreted] Thank you, Dr. Zhao. Next is our Q&A session. Chinese questions will be answered in Chinese. English questions will be answered in English. As usual, please limit your questions to 2 per person. Questions will be answered by Dr. Zhao and Dr. Gao.
I would now like to open up the call for Q&A. Operator, please assist.
[Foreign Language] [Operator Instructions] Your first questions come from Crédit Suisse, from Randy Abrams.
Yes. And appreciate your ongoing work dealing with the restriction. The first question I wanted to ask on the 2021 guidance assumes no significant adverse impacts from the restriction. From that, can you give an update on the U.S. service and consumables support you're receiving from licenses or from the U.S. companies overseas sites?
And second part of that question, could you discuss what areas you still need to resolve to either complete the expansion plan or also for ongoing operations?
Randy, thank you for the questions. Here's Hai Jun. And to your first question, you're asking about progress that SMIC is working with suppliers to get license from U.S. government. That's why we are working very hard with our suppliers. And our suppliers, majority are long-term partnership, has been working with SMIC for about 20 years. So we understand each other. We trust each other.
So at this moment, we're working hard to apply the licenses, work closely with U.S. government. I cannot give too much detail at this moment, but we are working very hard on that. And the suppliers are working very, very closely with SMIC and the U.S. government.
And to your second question that what area that we need to resolve in order to push the revenue in 2021, right? That's your question.
Yes. It's two-part. One is just with bottlenecks, both for operations and then also for that CapEx budget, if there's licenses you need to do the capacity expansion in the CapEx budget.
Randy, just now and from our updates, you already learned that for our FinFET, we already have 15,000 wafer installed capacities, and we will ramp up that capacity with products. And also, we think that we cannot meet our customer demands, especially for 0.15, 0.18 aluminum process for 8-inch wafers and 55-nanometer and 40-nanometer for 12-inch wafers. And we have a very big shortage. You possibly also heard the stories.
No doubt, for SMIC, every foundry fab now are fully loaded, short of the [ supplies ]. And we already have the alliance with our customers for the capacity support, and we are working hard to -- at this moment, for the mature technologies, we have been running fully loaded for a couple of quarters. And we do have a glitch in the third quarter last year, that's the reason and caused the dip of the fourth quarter. You know that. When we switch from one type of product mix and lost one of the biggest customer and then we switch to another one, we have one quarter as a transition quarter. That's the fourth quarter we are updating.
And for the first quarter, more or less, we [ turned back ] and to make the whole line fully loaded, but the problem is the demand is over our supply. So that's the area. Just now I mentioned that for 8-inch, we will add up the capacity. And we will add up 45,000 wafer per month by the end of this year and 10,000 wafer 12-inch by the end of this year. And that's the adding capacity. I know that this capacity come very late, could not meet up the market demands, but that's the best we can do at this moment.
Okay. I guess to clarify. Do you have the licenses to add that capacity and then also on mature nodes to resolve the bottlenecks for operations? Or do you still need to receive some licenses to ensure those -- both of those?
Yes, that's true. We need the licenses. We work hard with our suppliers to do this. And just now, we say that everything we work for the best. We work hard to build out the trust, to get it through. And just now, our CFO already updated that the majority of the expansion for this year, 3 quarter for the mature technologies is fixing the guidelines and you already know from the public media.
Okay. The second question I had, I wanted to ask on that guidance. It implies for second quarter sales at similar levels to first quarter, but also third and fourth quarter on the full year, 7 to 9, similar run rate. Is that all from running 100%? Or is there any impact from certain capacity having tool limitations like the advanced capacity or from any customer diversification?
Yes, Randy. Just now we say that for the first half year, we're now already in February, and in the first half year, we gave the guidance and that's the portion and currently we're working on pretty solid. And we also gave the cautions that for the second half of this year, we are working towards -- to the stable supplies everything. But we also remind our investors that there are certain uncertainty that we cannot 100% control.
Okay. So it sounds like uncertainty for second half to not guide further growth at this stage. Okay.
Sure, Randy. Thank you.
[Foreign Language] Your next questions come from Ng Szeho from China Renaissance.
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[Foreign Language] Your next question is coming from Chen JunJie from Tianfeng Security (sic) [ Tianfeng Securities ].
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[Foreign Language] Your next questions come from Charlie Chan from Morgan Stanley.
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[Foreign Language] The next questions come from CICC, Ding Ning.
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[Foreign Language] I would now like to hand the call back to Ms. Guang for closing remarks.
[Foreign Language] Thank you all for participating in today's conference call. Thank you for your trust and support, and I wish everyone a happy Chinese New Year and good health.
[Foreign Language] This concludes SMIC Fourth Quarter Earnings Conference Call. We thank you for joining us today.