SMI (SMI) 2021-05-14 Earnings Call Transcript

Welcome to Semiconductor Manufacturing International Corporation’s First Quarter 2021 Webcast Conference Call. Today’s call will be live streamed through the Internet at SMIC’s website. Webcast playback will also be available approximately one hour after the event. Please be advised that your dial-ins are in listen-only mode. 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.

Greetings. Welcome to SMIC’s first quarter 2021 earnings call. Today’s call is hosted by Dr. Zhao Haijun, 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. During the subsequent Q&A session, we will accept questions in both Chinese and English. The earnings release and presentation are available at www.smics.com. Let me remind you that today’s presentation includes forward-looking statements that do not guarantee future performances, but represent our estimates and are subject to risks and uncertainties. Please refer to the forward-looking statements in our earnings announce. Please note that today’s earnings statement use International Financial Reporting Standards, IFRS, and all currency figures are in U.S. dollars, unless otherwise stated. However, 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 announcement. I will now hand the call to CFO, Dr. Gao Yonggang, for financial highlights and guidance.

Let me recap related events from 2020. According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profits during the annual reporting period and its accumulated undistributed profits are positive, but no cash dividends are distributed, the company should provide a key explanation on matters related to the cash dividend plan in the earnings webcast after the disclosure of the annual report and before the record day of the Annual General Meeting. On this basis, the company’s 2020 profit distribution plan is as follows. .:

Thank you, Dr. Gao for the financial updates. I will now hand the call to our Co-CEO, Dr. Zhao HaiJun, to comment on market, company operations and technology platforms.

During the first quarter of 2021, SMIC still faced a challenging environment. On one hand, market demand was strong. Our current capacity could not fulfill customer needs and products in every market segment faced shortages from power management, RF, driver ICs to microcontroller units, specialty memories, CIS and other applications. On the other hand, certain restrictions on the company supply chain caused by the U.S. entity list created a lot of uncertainties in operational continuity and further capacity building and brought higher requirements to operational planning and engineering management. The company united as one and actively responded under this complex situation. We work extra hard in production planning and engineering management, steadily dedicated and devoted, repeatedly checking every link in the production process that may affect the company’s operational continuity, designed and implemented feasible plan, sought for verifications and solutions step-by-step and maintained a fully loaded operation. Under the current supply shortage situation, our principal for capacity allocation is give priority to meet the needs of customers that have collaborated and co-developed with the company for the long-term, then consider products with high growth margin. And at the same time, communicate closely with other customers to negotiate and accommodate their most important needs. We commit to be the finest and largest in scale for competitive advantage products and the lead in the market segments. Under the unremitting efforts of all our staff, 8-inch equivalent wafer shipment was $1.56 million in first quarter 2021, a 10% growth sequentially. First quarter revenue and gross margin beat guidance. Revenue grew 12.5% sequentially and exceeding $1.1 billion for the first time. Gross margin was 22.7% sequentially up 4.7 percentage points. Now let me provide details on non-FinFET and FinFET technology, respectively. For non-FinFET processes, the current market continues to be very strong and is in high demand and capacity will continue to be in short supply here at the end of this year. Among the nodes, 40 nano and 0.15, 0.18 micron are particularly tight. In the first quarter, revenue grew across the board in a segment market. Combined revenue from CIS, specialty memory and power management grew 20% sequentially. In addition with the development of the massive panel display supply chain, high voltage drive IC rose to the prominence. Demand has entered a rapid upward trajectory. In the first quarter, revenue from high voltage panel display driver ICs doubled sequentially using our 0.15 micron, 55 and 40 nano technologies.

Thank you all for participating in today’s conference call. Thank you for your trust and support.

This concludes SMIC first quarter earnings conference call. We thank you for joining us today.

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 two per person. Questions will be answered by Dr. Zhao and Dr. Gao. I will now like to open up the call for Q&A. Operator, please assist.

Your first question comes from Randy Abrams from Credit Suisse. Please ask your question.

Okay. Yes. Thank you and congratulations on the outlook, especially considering the restrictions. The first question, I have two-parts on the second quarter guidance for the 17% to 19% for the sales growth. For that growth, could you split the growth between shipment increase versus pricing and also from filling the 14-nanometer capacity that was underutilized after the Huawei restriction? That’s the first part. And the second part for growth through this year, since you’re operating here full, could you discuss how much capacity you would be increasing in second quarter and then also in second half over first half?

Randy, thank you for the questions. I can combine two questions for one answer. I can give you the first answers that for the capacity increment in the second quarter, similar to the first quarter, we will have 10% incremental in shipment and that’s contributed to the revenue of the total. And I cannot break down right away that the ratios between the price reading and shipments, but more likely you can calculate right away.

Okay. And I’ll do a quick follow-up on that for the FinFET, if you could discuss the applications and how that ramp is coming up from the trough. And the second question I have was on the gross margin coming back up to mid-20s, I think previously you expected could be mid to high teens. Could you discuss now if you think that’s the new baseline for gross margins if no further restrictions or if you could even improve that with the stronger pricing? So if you could discuss the gross margin outlook and then also FinFET applications.

Yes. Even though we cannot forecast too much on the total wafer shipments, because again, certain days and the supply chain and the other factors, but I agree with you on the comments on the margin part since the price base part of our locations hyped inside the base customer and vacant mall, I’d say it’s a pretty stable and on the full price for the gross margins. But by region definitely will be there, you’ll know that where we have a more capacity getting into production and we are getting a phase off of depreciation and that depends on how much we can move up the incremental capacity. So definitely for the final margin there will be some prostration and wafers there, you know that.

Okay. And so to clarify, it sounds like stable is similar levels, maybe able to be maintained as long as no major changes, like to keep stable in this level.

No, just now I said that, for the ASP part more we set up with customers, but if - the speed of the incremental capacity and depreciations, so definitely, we have the CapEx number already forecasted. There will be a gap between the CapEx and the two shipments. And we already say that this year we will have more than 10,000 wafers, over 10,000 wafers for 12-inch get into production. And we also have 45,000 wafers, 8-inch get into production. And based kind of depreciations and to guide our ways the guidance we gave that’s more or less formulary.

Okay. And one final follow up on the 45,000 8-inch. Do you feel comfortable at securing all of the tools that are used for your finding kind of semi or new tools? And do you feel confident on that capacity?

We should say that. For the future definitely there could be some uncertainties, but today’s moment the capacity amounted 45,000 8-inch wafers are height of a schedule, and we are to have more than 33%, one-third of the capacity build-up and they contribute to the revenue.

Okay, great. Thank you.

Thanks, Randy.

Your next question comes from Szeho Ng from China Renaissance. Please ask your question.

Your next question comes from Leping Huang from Huatai. Please ask your question.

Your next question comes from JunJie Chen from Tianfeng Securities. Please ask your question.

Your next question comes from Charlie Chan from Morgan Stanley. Please ask your question.

I would now like to hand the call back to Ms. Guo for closing remarks.