Semiconductor Manufacturing International Corporation (981) Earnings Call Transcript & Summary

Welcome to Semiconductor Manufacturing International Corporation's Third Quarter 2024 Webcast Conference Call. This call will be simultaneously streamed through the Internet and telephone. [Operator Instructions] With out further ado, I would like to introduce Ms. Guo Guangli, Senior Vice President and Board Secretary to host the meeting.

[Interpreted] Greetings. Welcome to SMIC's Third Quarter 2024 Webcast Conference Call. Attending today's call are 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. I will now hand the call to Dr. Wu Junfeng to introduce the company's financial status.

[Interpreted] First, I will report our unaudited results for the third quarter, followed by our guidance for the fourth quarter. The third quarter results are as follows: revenue was $2,171 million, up 14.2% sequentially. Gross margin was 20.5%, up 6.6 percentage points sequentially. Profit from operations was $170 million. EBITDA was $1,157 million. EBITDA margin was 53.3%. Profit attributable to the company was $149 million. Moving to the balance sheet. At the end of the third quarter, the company had total assets of $47.2 billion, of which total cash on hand was $12.6 billion. Total liability were $15.8 billion, of which total debt was $10.4 billion. Total equity was $31.4 billion. Debt-to-equity was 33.1% and net debt to equity was negative 7.1%. In terms of cash flow, in the third quarter, net cash generated from operating activities was $1,236 million. Net cash used in investing activities was $1,345 million. Net cash used in financing activities was $97 million. For the fourth quarter 2024, our guidance is as follows: revenue is expected to be flat to up 2% sequentially, and gross margin is expected to be in the range of 18% to 20%. This concludes the financial status. Thank you.

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

[Interpreted] Good morning. Thank you for attending SMIC's Third Quarter 2024 Earnings Webcast Conference Call. As we shared in August, in the first half of the year, domestic customers restocked and built up inventory in order to gain market share, and overseas customers hold in some shipments from the third quarter to the second quarter in order to hedge against market risk grew by geopolitics. In the third quarter, the net-net of 12-inch shipment increased and 8-inch shipment decrease led to the sequentially flat quantity in quarterly shipments. This is the first factor. Along with the accelerating demand for localization and the undersupplied situation for chipset capacity in the mainstream market, the price for some 12-inch nodes improved and product mix optimized. As a result, the blended ASP in the third quarter increased sequentially. This is the second factor. Combining the above factors, the company's revenue in the third quarter increased by 14% sequentially to $2.17 billion, a record high, reaching the milestone of $2 billion in a single quarter for the first time. In the third quarter, the incremental 21,000 12-inch monthly capacity with relatively high added value was quickly pulled into production, which further improved the product mix and increased the blended ASP sequentially. The overall utilization rate increased by 5.2 percentage points sequentially to 90.4%, which effectively diluted the per unit depreciation cost. Combining the above factors, the company's gross margin in the third quarter increased by 6.6 percentage points sequentially to 20.5% In terms of revenue by region, China, Americas and in Eurasia accounted for 86%, 11% and 3%, respectively. As we mentioned in August, due to the geopolitical considerations and response to the demand of Chinese market, some overseas customers did some shipment pull-in into the second quarter. Thus, the proportion of overseas revenue in the third quarter decreased by 6 percentage points sequentially. Under the situation of accelerating demand for localization and overall positive demand for exports, Chinese customers have gradually entered the mid- to high-end markets. Thus, the proportion of revenue from Chinese customers in the third quarter increased by 6 percentage points sequentially. By service type, revenue from wafer and others accounted for 94% and 6%, respectively. By final application, wafer revenue from smartphone, computer and tablet, consumer electronics, connectivity and IoT, industrial and automotive accounted for 25%, 16%, 43%, 8% and 8%, respectively. Consumer application is by far the company's largest category in terms of revenue share because we have a broader definition for it. We have seen that the demand in the consumer market has gradually recovered. Consumer product upgrade has been implemented and the demand for exports has remained positive. By size, wafer revenue from 8-inch decreased to 21.5% due to some shipment pulled into the second quarter, while wafer revenue from 12-inch increased to 78.5% because the overall 12-inch capacity was nearly fully loaded and its new capacity was quickly verified and pulled into production. In terms of product platforms, strong demand for BCD brought in orders and drove up the 8-inch utilization rate. -- in the fourth quarter, the company's guidance is revenue is expected to be flat to up 2% sequentially. Gross margin is expected to be in the range of 18% to 20%. In the past few quarters, 12-inch capacity was in short supply and some orders couldn't be fulfilled as scheduled. The fourth quarter follows traditionally seasonal pattern. Customers review their plans made at the beginning of the year and do adjustments downward in the fourth quarter if there are unmet goals. Although in the fourth quarter, customers' willingness for order placing and goods receiving is not that strong. After the negotiation with customers, the impact on the shipment in the fourth quarter is expected not too much. Additionally, around 30,000 12-inch monthly capacity is expected to be released in the fourth quarter, but it takes time to do verification. In conclusion, the overall utilization rate and shipments in the fourth quarter are expected to decrease. We hope to improve the blended ASP through product mix optimization, thereby ensuring the revenue in the fourth quarter to remain unaffected, flat to slightly increase sequentially. And thus, the gross margin is expected to be relatively stable. According to the results of the first 3 quarters and the fourth quarter guidance at the midpoint, the company's full year revenue is expected to be around $8 billion, approximately 27% year-over-year growth, which is better than the industry average growth rate in the same market. The full year gross margin is expected to be around 17%. By the end of the year, the monthly capacity is expected to reach around 950,000 8-inch equivalent wafers. In order to meet the existing customer needs, the company accelerates the capacity deployment of power device so as to fully support the development of automotive, industrial and new energy markets. During the previous round of upturn cycle, the company's revenue hit its highest point in the third quarter of 2022. Due to the impact of complex external factors, this cycle has been extended longer than before and the recovery in the industry is relatively mild. Next, we will strengthen our confidence in development, maintain our strategic focus, dedicate in wafer manufacturing and accelerate the platform verification. Given the intensified competition in the industry, we will work to stabilize our market share and consolidate our position in the industry. Finally, I would like to thank all employees, customers, suppliers, investors and community for their attention, trust and support to the company. Thank you.

Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Zhao and Dr. Wu. Chinese questions will be answered in Chinese. English questions will be answered in English. [Operator Instructions]. I would now like to open up the call for Q&A. Operator, please assist.

[Operator Instructions] First question comes from Sunny Lin from UBS.

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Our next question comes from the line of Leping Huang from Huatai Securities.

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[Operator Instructions] Next question comes from the line of Jan Shao from Haitong [indiscernible]

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Our next question comes from the line of Hu Jian from Guosen.

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Our next question comes from the line of Jie Chen of Tianfeng.

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[Interpreted] I would now like to hand the call back to Ms. Guo Guangli for closing remarks.

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

[Interpreted] This concludes SMIC's Third Quarter Webcast Conference Call. we thank you for joining us today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]