Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2022-Q4

[Operator]

[Foreign Language] Welcome to Semiconductor Manufacturing International Corporation's Fourth Quarter 2022 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and telephone. [Operator Instructions]

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

[Guang Li Guo, executive]

[Interpreted] Greetings. Welcome to SMIC's fourth quarter 2022 webcast conference call. Attending today's call are Dr. Gao Yonggang, Chairman; Dr. Zhao Haijun, Co-Chief Executive Officer; Dr. Wu Junfeng, Senior Vice President and Person-in-charge of Finance.

Let me remind you that today's presentation may contain forward-looking statements that do not guarantee future performance but represent the company's expectations and are subject to inherent risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement.

Please note that today's earnings statement is presented in accordance with International Financial Reporting Standards, IFRS, and all currency figures are in U.S. dollars, unless otherwise stated.

First of all, we invite Dr. Yonggang Gao to speak.

[Yonggang Gao, executive]

[Interpreted] Greetings to all shareholders, investors and friends from the line. First of all, on behalf of the company, I would like to express my heartfelt thanks to friends who have always been caring about and supporting the development of SMIC.

As a semiconductor manufacturing company, registered in Cayman Islands, positioning in China and serving globally, SMIC has been always adhering to the principle of independence and internationalization operating in compliance with the laws and regulations and striving to provide global customers with high-quality products and service as our goal.

In the past 22 years, the company has manufactured more than 60 million 8-inch equivalent wafers, close to 100 billion of chips accumulatively. Our products have spread out into thousands of families and all over the world, which are widely used in different areas, such as mobile phones, consumer electronics, smart home, industrial, automotive and make contribution to technology advance and a better life for people.

In recent years, the international environment of the semiconductor industry is undergoing a new round of changes and a global professional system of this industrial supply chain division has been hit. Facing the new external situation and challenges, SMIC needs to build sustainable and high-quality development capability in a more scientific way.

As one of the important forces in the global foundry areas, SMIC will continue to give full play to its own advantages, increase efforts in the development and optimization of differentiated process technologies as to build richer and more competitive process platforms. As a trusted and reliable partner for global customers, the company will firmly adhere to market-oriented, customer-focused concepts, establish a more efficient business, operation and management systems and provide customers with better products and service.

Although facing various difficulties and challenges, we firmly believe that the long-term logic of demand growth for wafer manufacturing remains unchanged, and we are confident in the company's medium- to long-term development.

Mainland China is one of the largest and fastest-growing IC markets in the world, and it's one of the important regions in the division and cooperation system of global IC industry. While the semiconductor industry is one of the fields that can vastly demonstrate global technological collaboration at advance. SMIC always adheres to the attitude of compliant operations, open and innovation, coexist and co-win. The company is well in to jointly establish and maintain a healthy and efficient semiconductor ecosystem, together with domestic and foreign industrial chain partners.

Thank you, all.

[Guang Li Guo, executive]

[Interpreted] Thank you, Dr. Gao. Next, I will hand the call to Dr. Wu Junfeng to introduce the company's financial status.

[Junfeng Wu, executive]

[Interpreted] First, I will report our unaudited financial results for the fourth quarter and the full year of 2022, followed by our guidance for the first quarter of 2023.

The fourth quarter's financial results are as follows: revenue was $1,621 million, down 15% sequentially and up 2.6% year-over-year. Gross margin was 32%, down 6.9 percentage points sequentially and 3 percentage points year-over-year. Profit attributable to the company and the non-controlling interests were USD386 million and USD40 million, respectively.

The company's unaudited financial results for full year of 2022 are as follows: revenue was $7,273 million, up 33.6% year-over-year. Gross margin were 38%, up 7.2 percentage points year-over-year. Profit from operations was $1,836 million, up 31.8% year-over-year. Profit attributable to the company was $1,818 million, up 6.8% year-over-year. EBITDA was $4,611 million, up 20.7% year-over-year. CapEx for the year was $6.35 billion.

Moving to the balance sheet. At the end of 2022, the company had total assets of $43.8 billion, of which total cash on hand was $18.7 billion. Total liabilities were $14.8 billion, of which total debt was $8.7 billion. Total equity was $29 billion. Debt to equity was 30% and net debt to equity was negative 34.4%.

In terms of cash flow, in 2022, we generated $5,348 million cash from operating activities. Net cash used in investing activities was $10,392 million. Net cash from financing activities was $3,614 million.

For the first quarter 2023, our guidance is as follows: revenue is expected to be down 10% to 12% sequentially, and gross margin is expected to be in the range of 19% to 21%.

This concludes the financial status. Thank you.

[Guang Li Guo, executive]

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

[Haijun Zhao, executive]

[Interpreted] Happy Chinese New Year, and welcome to the earnings call today.

In 2022, the market demand for smartphones, computers and home appliance turned from strong to weak, and customers' willingness to place orders were significantly weakened. The industrial chain entered into a downward cycle from supply shortage to destocking. Meanwhile, the changes in the international geopolitical situation have brought profound impact on the globalization landscape of IC industry, making the industry face an unprecedented severe situation.

In fourth quarter, the company's revenue was $1,621 million, down 15% sequentially, and gross margin was 32%, which were both in line with the company's expectations and guidance. According to the unaudited financial results, revenue for 2022 full year crossed to $7.2 billion, up around 34% year-over-year, with annual growth rate of more than 30% for 2 consecutive years in 2021 and 2022. The gross margin in 2022 increased to 38% hit a record high.

By region, annual revenue from China, America and Eurasia accounted for 74%, 21% and 5%, respectively, with 42% and 24% increase in the revenue amount, respectively, year-over-year from China and America.

By size, wafer revenue for 8-inch and 12-inch accounted for 33% and 67%, with 24% and 42% increase in the revenue amount, respectively, year-over-year.

Wafer revenue by application, platform, consumer electronics, smart home and others accounted for 27%, 23%, 14% and 36% with 14%, 32%, 48% and 54% increase in revenue amounts, respectively, year-over-year. The growth of consumer electronics and smart home mainly came from the application of home appliance and wireless connectivities, industrial, IoT and other applications have achieved substantial growth, driven by the demand for automation, industrial power management and wearable devices. At the same time, with the company's active promotion of automotive-grade qualification, platforms such as PMIC, body control and infotainment have been launched one after another. Revenue from new energy vehicles has grown significantly.

Capital expenditures in 2022 was $6.35 billion. By the end of the year, monthly capacity increased to 714,000 8-inch equivalent wafers with an increase of 15% year-over-year. Annual capacity utilization rate still reached 92% with the gradual release of new capacity. Looking at the 4 new matured 12-inch project. By the end of 2022, SMIC Shenzhen entered into production, SMIC Jingcheng entered into pilot production, SMIC Lingang completed construction of main fab shell, and SMIC Xiqing started the construction. The mass production of SMIC Jingcheng is scheduled to postpone by 1 to 2 quarters due to the delay of bottleneck equipment.

Looking forward into 2023, it still takes time for the smartphone and consumer electronics market to recover. The industrial sector is relatively stable, while the incremental demand in automotive electronics industry can only partially offset the negative impact of weak mobile phones and consumers. In the first half of the year, the industry cycle is still at the bottom. The impact of external uncertainties is still complex. Although the visibility for the second half of the year is still not clear, the company has always seen some recovery of customers' confidence. The reserve of new product tape-out is relatively sufficient.

Combining the above factors, the company's first quarter guidance is as follows: revenue is expected to be down 10% to 12% sequentially, and the gross margin is expected to decline to the range from 19% to 21% due to the impact of lower capacity utilization and higher depreciation. Based on the premise that the external environment is relatively stable for the year of 2023, revenue is expected to decline by low-teens percentage year-over-year, and gross margin is expected to be around 20%. Depreciation is expected to increase by more than 20% year-over-year. The capital expenditures is expected to maintain roughly flat compared to that of previous year.

Let me give some comments for the above guidance. First, during the process of continuous high investments, gross margin is under the pressure of high depreciation, which is the rule of the industry. The company will always target sustained profitability, strive to grasp the pace of capacity expansion to ensure a certain level of gross margin. Secondly, the company's capital expenditures this year will be mainly used for mature capacity expansion and the infrastructure for new fabs. The company will steadily push forward the capacity building of 4 mature 12-inch fabs. As the plans are being carried out in a few geopolitical regions to build up local wafer manufacturing capabilities, the supply chain of critical tools maintains tight. The incremental monthly capacity by the end of the year is expected to be similar to that of previous year.

In the long run, in the era of more extensive digitalization, intelligentization and greenization, the demand for chips still continues to grow. The company will follow the trend and grasp the rule of the industry, consolidate leading advantages in segmentation markets, strengthen the medium- and long-term bundled cooperation with global customers and system companies and promote the win-win cooperation in upstream and downstream of the industry chain.

Here, I would like to thank all employees, customers, suppliers, investors and community for their continued trust and support to the company. We wish you and your families a happy and prosperous new year. Thank you.

[Foreign Language]

[Guang Li Guo, executive]

Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Gao, Dr. Zhao and Dr. Wu. Chinese questions will be answered in Chinese. English questions will be answered in English. Please limit your questions to 2 per person. I would now like to open up the call for Q&A. Operator, please assist.

[Operator]

[Foreign Language] The first question comes from the line of Leping Huang from Huatai Securities.

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Yonggang Gao, executive]

[Foreign Language]

[Operator]

Next question comes from Randy Abrams from Credit Suisse.

[Randy Abrams, analyst]

First question, I wanted to ask about your outlook on gross margin. Just for first quarter, if you could discuss a bit more magnitude of the decline. I think in prepared remarks, you mentioned the utilization and depreciation. It still looks like a fairly sharp decline relative to the revenue decline. So could you talk a bit more on the pricing environment or any mix factors? And then the follow-up would be as we go through the year, you're guiding a similar gross margin level, but I think implying a sequential improvement in sales. So maybe just go through some of the profitability drags or if you're leaving some conservatism.

[Haijun Zhao, executive]

Randy, thank you for the questions. I'm talking about the gross margin job in the first quarter, you'd like to know the breakdown how much comes from debate for all reduction, how much comes from the price erosion. That gross margin mainly come from 2 factors. The first one is majority part comes from the reduction of the wafer out because the total order job from the last quarter. And the second is the increase of new depreciation, and we have the expenditure, and we have the CapEx. When they move in the fact the other matter you have the order or not according to the financial rules, we all started the depreciation. These 2 are the major factors. With the combination of the product mix and the ASP erosion in the first quarter is still at a minimum level.

[Randy Abrams, analyst]

Okay. Good. And through the year, is it more just the same factor. I think you're expecting even with the outlook, some sequential improvement through the year, but is it more just more offset by the depreciation factor that's holding back improvement from the first quarter, at least implied in the annual gross margin guidance.

[Haijun Zhao, executive]

Yes, you are right. When we expect the recovery of the market with the overall economic situation, and we know that a lot of new orders possibly come from the commodity type of products like NAND Flash, NOR Flash, MCU, CMOS imager, ISP, RCD (sic) [ LCD ] driver, this type of chunk orders. But these kind of products will be at a lower price. Basically, when the market recovered to the same level of 2 years back, and we will find out the total supply of the capacity has been increased a lot. So the price may not recover to the permitted level.

And taking into account of this factor, we will say that even though we guided revenue, we will guide utilization up possibly in the second half year, but the gross margin may not recover that much.

[Randy Abrams, analyst]

Okay. No, that's helpful. So it sounds like it's a little more mixed initially, the commodity products. So actually, my second question is on that because you're staying aggressive on continuing to expand through the downturn. So for refilling or getting back to peak, like full utilization, so would the mix be most of those areas you mentioned like the flash memory, microcontroller, CIS? Or could you go through some of the tape-out and qualification activity in terms of mix that may -- as you get into the next wave, like some of the tape-out activities, if there's some of the applications you're optimistic on to get back towards full utilization in the recovery?

[Haijun Zhao, executive]

Yes, Randy. If you look at the numbers we gave just now, the mobile phone sector only accounted for the total revenue of 27% and the consumer account for about 23%, that's added up to 50% of the total. But previously, the sector for mobile phone accountable about 35% to 45%. That means that sector drops very, very seriously, and the consumer also dropped a lot. When we see the recoveries because the foundry business is a very big sector comes from the mobile phone and the consumer, we can expect that the mobile phone will recover to 35% something and the consumer recovered to something like 28% to 30%. And that moment, definitely, our utilization will be up to 90% something.

[Randy Abrams, analyst]

Okay. Great. It's recovery of those key markets...

[Haijun Zhao, executive]

It depends heavily on at least 2 sectors of the market.

[Operator]

Next question comes from Szeho Ng from China Renaissance.

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

The next question is come from [indiscernible] Haitong Securities.

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

The next question comes from [indiscernible] from Citi.

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

We have a question from [indiscernible] from Guosen Securities. Looks like there was no response from the line.

I will now close the Q&A. [Foreign Language] I would now like to hand the call back to Ms. Guo Guangli for closing remarks.

[Guang Li Guo, executive]

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

[Operator]

[Foreign Language] This concludes SMIC's fourth 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.]