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

[Interpreted] Welcome to Semiconductor Manufacturing International Corporation's First Quarter 2025 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and telephone. [Operator Instructions] Without further ado, I would like to introduce Ms. Guo Guangli, Senior Vice President and Board Secretary, to host the webcast.

[Interpreted] Greetings. Welcome to SMIC's First Quarter 2025 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 first quarter of 2025, followed by our guidance for the second quarter of 2025. The first quarter results are as follows: revenue was $2,247 million, up 1.8% sequentially. Gross margin was 22.5%, down 0.1 percentage points sequentially. Profit from operations was $310 million. EBITDA was $1,292 million. EBITDA margin was 57.5%. Profit attributable to the company was $188 million. Moving to the balance sheet. At the end of the first quarter, the company had total assets of $48 billion, of which total cash on hand was $12.7 billion. Total liabilities were $15.7 billion, of which total debt was $11.3 billion. Total equity was $32.2 billion. Debt-to-equity ratio was 34.9% and net debt-to-equity ratio was negative 4.5%. In terms of cash flow, in the first quarter, net cash used in operating activities was $160 million. Net cash used in investing activities was $1,328 million. Net cash used in financing activities was $354 million. For the second quarter 2025, our guidance are as follows: revenue is expected to decrease by 4% to 6% sequentially and gross margin is expected to be in the range of 18% to 20%. This concludes the financial status. Next, let me recap the relevant matters related to the company's 2024 annual report. According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profit 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 date of the Annual General Meeting. The technical capability, production capacity, revenue scale and market share are important indicators for foundry and IC market to measure its company competitiveness and market position. The company is currently in an important period of capacity construction rollout and continuously increasing market share. Both capacity construction, research and development activities still require continuous capital expenditures Therefore, currently, the company's free cash flow, the operating cash flow deducted by the capital expenditure, is still negative. In 2025, the company's capital expenditure is expected to be roughly flat compared to that of previous year. Under this investment plan, the company currently still needs to prioritize allocating funds to its core business, including capacity expansion and R&D activities. This arrangement helps to continuously enhance the company's core competitiveness and corporate value, ensure the company to continuously maintain its leading position in fierce market competition and protect investor interest with a maximum degree. Thus, the company plans not to do profit distribution for the year 2024. This arrangement is more in line with the company's long-term development needs and the long-term interest of shareholders and in accordance with relevant laws and regulations, regulatory documents and the company's profit distribution policy as well. There are no circumstances that harms the interest of the company and its shareholders. The plan has been reviewed and approved by the Board of Directors and published in the annual report and will be submitted for approval at the Annual General Meeting. We would like to thank our shareholders for their understanding and support.

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

[Interpreted] Hello, everyone. Thank you for attending SMIC's First Quarter 2025 Earnings Call. In the first quarter, the company realized revenue of $2,247 million, a sequential increase of 1.8%. By service type, revenue is categorized into wafer revenue and other revenue, which accounted for 95.2% and 4.8%, respectively. The wafer revenue amount increased by close to 5% sequentially, of which wafer revenue from 8-inch and 12-inch increased by 18% and 2% sequentially. This growth was primarily attributable to customer shipment pull-in brought by the changes in geopolitics. The demand rise in commodity products driven by policies such as domestic trading programs and consumption subsidies and button out and restocking in the field of industrial and automotive. Thus, the company's overall shipments increased by 15% sequentially to 2,292,000 standard logic 8-inch equivalent wafers. However, due to the fab production fluctuation, the blended ASP for the latter half of first quarter decreased. The quarterly revenue didn't meet the original guidance. This impact is expected to extend into the second quarter. In terms of revenue by region, China, America and Eurasia accounted for 84%, 13% and 3%, respectively. The revenue amount from China remained stable. The revenue amount from overseas increased sequentially, mainly due to the aforementioned 3 factors: wafer revenue by application, the revenue from smartphone, computer and tablets, consumer electronics, connectivity and IoT remained relatively stable, which accounted for 24%, 17%, 41% and 8%, respectively. The revenue amount from industrial and automotive increased by more than 20% sequentially and its revenue contribution increased from 8% to 10%, benefited from major customers' achievements in automotive field, the company's increased investments and key deployments on automotive electronics platforms over the past few years and the company's close collaboration with industrial chains in areas such as BCD, CIS, MCU and domain controllers. The company's shipments of automotive-grade products have achieved steady growth. If you look into the financial reports from IC industry leaders across various sectors, you will find that these customers usually choose SMIC as their preferred partner for new products. New energy vehicle industry has developed a distinctive path in China, and our customers have achieved remarkable progress. Also, the company has seized these opportunities to drive the revenue growth in our automotive business segment. In terms of product platforms, the company has continued to promote process iterations and product upgrades while proactively responding to customer needs. Amid a broadly moderate market recovery, the demand from BCD, MCU and specialty memory was strong. The overall revenue from these platforms increased around 20% sequentially. In the field of heavy CMOS, the small panel AMOLED display driver platforms applied in 40-nanometer and 28-nanometer were in short supply due to the limited capacity. Additionally, the company has collaborated with strategic customers and partners to pioneer the launch of 40-nanometer high DRAM display driver chip products, with high added value and high cost performance. This platform has achieved mass production and being applied into end-use industries. In the field of CIS and ISP, in order to better meet new product demand, the company has continuously expanded technology platforms and production capacity deployment to secure more orders. In the first quarter, the company's gross margin was 22.5%, remaining flat sequentially. The capacity utilization rate increased by 4.1 percentage points sequentially to 89.6%, among which the utilization rate of 12-inch remains stable, and the utilization rates of 8-inch increased to the average level at 12-inch, thus roughly offset the impact of declining blended ASP and rising depreciation on gross margin. In the second quarter, the revenue is expected to decrease 4% to 6% sequentially. The shipment unit is expected to be relatively stable and the blended ASP is expected to decrease. The gross margin in the second quarter is expected to be in the range of 18% to 20%, 1 percentage point below the original guidance of the first quarter. The company has mitigated the impact of price fluctuation through cost reduction and efficiency improvement. However, the equipment depreciation in second quarter will continue to increase and the gross margin guidance decreased comparing to the first quarter level. Although there are many new factors coming into the market currently, most factors are known as before. Therefore, there is no significant change in the fundamentals compared to the first quarter. Customers have responded calmly and the company's capacity utilization rate continues to keep at a high level. We have observed positive signals that various industries have bottomed out, including industrial and automotive. The localization transformation of supply chain has been strengthened and more manufacturing demand has shifted back domestically. The market is experiencing anxiety brought by tariff policy changes and others. Next, whether the tariff policy will hard land, whether market stimulus and the rush stocking will overdraw the future demand, whether the demand for commodity products will decline due to the pricing increase brought by the new tariffs, all these deserve to be closely paid attention to. Our visibility on second half is not clear, especially from the latter half of third quarter to end of this year. We will give more comments in next earnings call in August. The company believes that the second half of the year presents both opportunities and challenges. The problems encountered by the company are also issues that everyone has to face. The company will enhance its adaptability and risk resilience capability. The company's top priority remains as strategic focus on its core business and near-term deliverables. Finally, I would like to thank all customers, suppliers, investors and community for their understanding and strong support to the company. Thank you.

[Interpreted] 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.

[Interpreted] [Operator Instructions] Your first question comes from the line of Leping Huang of Huatai Securities.

I have two questions. First, after the new US tariff policy was announced on April 2, what has been the impact on the Company’s equipment purchases, as well as on demand from the Company’s Chinese and international customers and their willingness to place orders with SMIC? You also mentioned pull in demand earlier. How do you see the sustainability of that demand after Q2? How is the Company going to respond to the new situation?

This is an issue that everyone is concerned about. There is a sense of anxiety regarding the impact of tariffs. Internally, we have conducted assessments and measurements. We have also had in-depth exchanges with suppliers and customers, including foreign customers. First, in terms of the policies that have already been implemented, the government has maintained close communication with the industrial sector. It has a very limited direct impact on the industry—less than 1%. There will be follow-up negotiations. We are optimistic that the situation may improve further. If that is the case, the impact of the tariffs on the semiconductor and foundry industries should be fully manageable at the factory and procurement levels. Much impact from the tariffs can be resolved through settlement and exemption processes. Another part can be mitigated through supply diversification. As such, the direct impact is very limited. That is the first point. Regarding the second issue: due to concerns about tariffs and future uncertainties, products scheduled for sale later in the year or next year are being shipped earlier, ahead of any potential tax increases. This means that sales in H2 of this year and even into next year will not be affected. This shift has resulted in some increase in orders although the overall impact is not large. Currently, most companies' capacity is already fully utilized. SMIC, for example, was operating at full capacity in Q4 last year. There is not much room for further expansion in the short term. Additionally, we see that the bigger bottleneck is sea freight and air freight that don't really have that much capacity to get everything to the destination. This front-loading of shipments provides some stability and strength to orders, but it is not the primary driver of our current turnover. I think the situation is such that companies are doing what they can for now. The next step is to wait until August or September to assess whether they have prepared adequately or have overstocked. In my view, the greater impact does not lie in the eventual outcome of the tariffs. The real issue is the same every year. Everyone is optimistic early in the year in many industries—cell phones, PCs, consumer electronics—forecasting double-digit growth, say 10% to 15%. By August or September, the industries begin to face reality and evaluate how much can be sold during the year. Companies also assess their inventory and outstanding orders to determine if there is sufficient demand through the end of the year and into Q1 and Q2 next year. If not, corrections are made. This is why we often see a correction around August and September, leading to the traditional Q4 slowdown in production lines. This seasonal off-cycle is not solely caused by the two annual phone launches—in April and October—but also by how companies manage their inventory stocking. As these cycles play out, we see fluctuations in stocking behavior. Currently, cell phones account for less than 30% of the turnover. Another reason is that, at the start of the year, companies set ambitious targets. By August and September, they revise these expectations and scale back production in Q4. That’s what we are currently seeing, the correction in Q4. As for SMIC’s visibility, the outlook through the end of Q3 looks very good. However, visibility regarding production for Q1 next year and Q4 this year is still uncertain. We expect that by the results conference in August, we will have a clearer view of shipments for Q4 and Q1 of the following year.

The second question concerns Q2 guidance. I see that revenue is projected to decline by 4% to 6%. You mentioned earlier that this is mainly due to declining ASPs. Since Q1 2023, ASPs had been trending upward. This is the first time we’re seeing a decline. I recall that during a past presentation, you mentioned a speedy action to stop speaking, referring to an abrupt drop in demand. This time, you used 12 words: maintain the strength, do the industry, and do a good job now. How should we interpret those 12 words? Specifically, what do they suggest about the Company’s future pricing strategy and capital expenditure plans? How will those be reflected in the ASP, shipments and other factors investors care about?

That question does require clarification. At the time of our last results conference, we issued guidance and forecasts. The situation then, including the utilization rates of the production lines, remained stable and, in fact, improved slightly. However, following the presentation, we encountered unexpected events which we had not foreseen. One such event was related to the annual maintenance of one of our plants, which impacted the overall production line. When the line resumed operation, there were consequences for process accuracy and product yield. The second issue involved the performance of certain equipment during the validation process. Improvements were needed in equipment process performance. Those upgrades caused some volatility in product yield. We experienced over a month of disruption in Q1 due to those factors. The resulting decline in performance affected Q2 because many shipments occurred after the results conference, leaving only a month or so in the quarter, which then extended the impact across a three- to four-month period. Overall, ASPs have not undergone fundamental changes. However, on the one hand, it was a one-time, isolated event. On the other, the equipment improvement process is ongoing. This improvement is a learning curve that requires time to complete. Bringing the entire production line up to top standards in wafer quality, yield, and delivery requires time. We define this situation as having both inevitability and contingency. The contingency lies in the plant maintenance, which is one-off. The inevitability lies in the equipment improvement process, which requires repeated learning cycles. In the semiconductor industry, this kind of engineering learning and process refinement is well understood. It takes one or two cycles to achieve the desired outcomes. In our 12-inch fab, which has a longer production cycle, these factors have affected both Q2 and the first half of Q3. We have just made a commitment to our investors that SMIC will remain resolute in the face of such a complex environment and the challenges we are facing, and that we will do a good job in our industry now. Maintaining the determination to succeed in this environment is critical. Many of our peers in the industry have made significant efforts by setting up factories abroad, establishing overseas warehouses, and so on. However, due to abrupt and substantial policy changes, years of work can be undone almost overnight. Those developments have reinforced SMIC’s belief that our focus must be on facing and adapting to changes directly. The changes are not unique to us. Our counterparts face the same uncertainties. The key is not to resort to clever but excessive or unproven actions that we have no experience executing successfully. Instead, we must focus on excelling within the industry and becoming a leading enterprise. Our goal is to do things earlier and better than others, with higher quality, greater competitiveness, stronger support for and closer alignment with our customers. This strategy eliminates the need for extraneous actions in which we have no successful precedent. Second, we believe there are still many opportunities ahead for China’s foundry industry and SMIC. If we can deepen our customer relationships, expand capacity, develop more complete product platforms, enhance delivery quality, and offer competitive pricing, we will succeed. We do not intend to pursue shortcuts. This is a statement we have made clearly to everyone. As we look ahead to H2 of the year and beyond, we face numerous uncertainties, including policy shifts, international political developments and more. It is unrealistic to hedge against every possible scenario in advance. Instead, our focus should be on engaging with customers, setting future platform strategies, ensuring capacity is prepared, refining processes and product platforms, and calibrating pricing and costs accordingly. If we do them well, we are confident in SMIC’s future growth.

[Interpreted] Your next question comes from [indiscernible] of Orient Securities.

I’d like to ask about R&D spending in Q1. I saw that it was USD150 million, which was a decline compared to the same quarter. How should we interpret this? Has intensive R&D already been completed for many processes? What is the background?

Q1 has certain unique characteristics. SMIC has consistently allocated 8% to 10% of its revenue toward R&D over many years. We continue to develop more platforms and have recruited many talented individuals to build a robust R&D team. In Q1, we brought in more equipment and personnel were on-site to install and debug it. At the same time, we faced a surge in rush customer orders, which meant a significant portion of our production capacity was redirected to meet urgent shipment needs. As Dr. Junfeng Wu mentioned earlier in the financial presentation, our capacity utilization increased by 4.1%, with strong utilization in both 12-inch and 8-inch fabs. Given this situation, the volume of R&D wafers that could be completed in Q1 was constrained. However, our capacity continues to grow as we are investing approximately USD7.5 billion in CAPEX annually. We are increasing production capabilities. With this expanded capacity, R&D activities will resume their usual pace.

I’d like to follow up on a related topic. We see that revenue per capita is growing rapidly and now significantly outpaces the domestic industry average. This may be linked to improved R&D efficiency and a notable reduction in administrative staff. Could you elaborate on how SMIC is improving revenue per capita or operational efficiency?

There are two main aspects to this. First, in our industry, higher fab utilization naturally leads to increased revenue per employee. For example, if 8-inch fab utilization rises from just over 80% to over 90%, then naturally, with the same number of employees, we see higher productivity, profitability, and wafer output. At the same time, automation within our fabs is more advanced than before. Tasks previously performed manually are now handled through automation or robotics. For instance, operators who work in four shifts per two rotations used to require four additional workers. With automation, the labor load is significantly reduced. SMIC is currently implementing automation and digital systems across its factories, including in 8-inch facilities. Utilization of 8-inch capacity has risen. The number of wafers produced monthly increased by 18% in Q1, but our headcount did not increase. Those improvements were driven by automation. Second, you are correct in noting that some operational efficiency comes from structural changes. SMIC started from scratch in Zhangjiang, building its foundry business. Along the way, we also developed many supporting facilities, such as dormitories and even schools which are staffed with full-time employees. Those employees are still counted in SMIC’s total headcount. We are evaluating whether those functions, which are unrelated to manufacturing operations, can be spun off and operated independently. For example, the management of schools and dormitories can be handled separately. Many other companies do not have such facilities in-house. This is an area where we will continue to improve. SMIC is fundamentally a manufacturing company. When we benchmark against industry leaders, we see that the operational headcount related to manufacturing should be our focus. Personnel involved in non-core functions should not be included.

The second question is about the blueprint for the development of the Company’s global operations mentioned in the Annual Report. Could you share your perspective on this plan considering the current international environment? For example, does it focus on local for local for overseas customers, or are there other strategic considerations?

This question was touched on earlier by Leping. At present, SMIC focuses on doing a good job with our core businesses and maintaining strategic discipline. Our global operations strategy does not involve building fabs or manufacturing facilities around the world. We have no such plan for now. Various proposals are being analyzed, but there is no definitive plan for global manufacturing expansion. The broader concept of global operations is to support customers and markets worldwide. For example, in Q2, SMIC’s production value in Eurasia and the US increased. Part of this increase stemmed from overseas customers who have market share in China. They preferred to use Chinese manufacturing resources to serve that market, i.e., what we call local for local or China for China. But many of their products are also sold globally. Our goal is to provide them with sufficient capacity, high-quality output, and competitive pricing so they can succeed in the global market. By doing so, we help our customers grow their market share and ensure SMIC continues to receive strong order volumes. This is the focus of our global operations strategy. Now, with seasonal demand, there are times when demand from domestic customers can increase and disappear very quickly. When demand surges, some customers may insist that we stop supporting others and allocate all our capacity and manpower to their platforms. However, SMIC is an international company with a global vision. We will not abandon our international market share or commitments to customers because of sudden demand from nearby or domestic clients. We remain committed to serving all our customers and growing together with them. This is the core principle behind SMIC’s emphasis on global operations. We will not become overly inclined toward a single market even if that market is experiencing rapid growth and high demand. Consequently, by the end of this year, you will see that SMIC’s turnover from international markets, including the US, will have increased further compared to last year.

[Interpreted] Your next question comes from Xiaofei Zhang of Haitong.

Dr. Zhao just gave a detailed explanation of pricing and industry demand. I’d like to ask about production capacity. Does the Company have any preliminary plans for capacity expansion over the next three to five years? Will the pace be like the past four to five years? Regarding mature support nodes, is the focus still on 28nm or 40/45nm?

It's difficult to speak definitively about the next three to five years. Let’s look at the past. Since 2020, SMIC has announced several expansion projects in Beijing, Shenzhen, Lingang, and Tianjin. Those projects are still being developed and have not yet been fully completed. The Company remains committed to those projects and our development continues. As I’ve mentioned previously, SMIC is constrained by its financial strength, depreciation pressure, and the pace of market development. We don’t complete everything we announced at once but rather follow a steady rhythm. Looking back from 2020 or 2021 over a five-year period, or 2-3 years or 7-8 years, we maintained a relatively linear expansion, increasing 12-inch wafer capacity by approximately 50,000 units per year. This corresponded with an annual investment of around USD7.5 billion, 82%–85% of which is allocated to production equipment, with the remainder spent on land, construction, and [indiscernible]. This is a very healthy pace. Currently, SMIC's capacity utilization is still at 90%, which includes newly added capacity. When equipment is brought into a fab, it takes time to reach full-scale mass production, which is about 16 months for domestic customers [ as they are near us and the products are ready made ] and 26 months for foreign customers. That means our equipment has 100% utilization. The gap pulls down our capacity utilization rate. Maintaining a utilization rate of 90% or above suggests our order preparation and market development pace are still reasonable. Continuing to grow at a rate of 50,000 12-inch wafers per year seems appropriate. We are adhering to this scale moving forward. Additionally, as I’ve said, we respect investor expectations. Maintaining a 20% gross margin has always been our bottom line. Rapid expansion within a year increases depreciation pressure, making it difficult to maintain this margin. Therefore, we consider multiple factors such as order growth, market development, excess capacity, pricing and depreciation pressure, and solve this multivariate equation to determine our pace of development. With the domestic industrial chain conversion accelerating, there are new opportunities. But opportunities and challenges coexist. While SMIC's output can continue to grow, we also face competitive pressure and pricing declines. We are carefully factoring these elements into our growth model. If we can build our own capacity, enhance our technological competitiveness, strengthen customer partnerships, and maintain competitive pricing, then we can continue to grow at the current pace.

My second question is about pricing. You mentioned that production fluctuations have had an impact. I’d like to better understand those fluctuations. My impression is that they would affect cost rather than gross margin. Yet gross margin came in slightly better than the previous guidance. I understand there might have been a strong increase in shipments, but prices also dropped in Q1. Could you help break this down further, Dr. Zhao?

Regarding SMIC’s ASP, despite speculation in the market, we did not lower prices. Our ASP prices are comparable to those of our peers, neither higher nor lower. You may have heard from other exchange meetings in the industry about the pricing trends. The weighted average ASP change for the year is around 5%, which is roughly the upper limit. However, single events can cause revenue volatility. For example, if a specific issue affects yield or raises customer concerns, pricing on the receiving end may decline even if chip volume remains stable and the production cost per unit does not fall. Those are issues that take time to resolve, such as equipment validation and process improvements. After the communication meeting in Q1, we encountered a specific issue. During annual maintenance, plant services triggered some potential problems. By the time we identified them, the affected wafers had already passed through the production line. The issue impacted how we processed and negotiated wafer shipments with customers, affecting our turnover. This issue was gradually being resolved. As production increases, some instability in equipment is expected. We're improving this through learning about the production lines, enhanced process manuals, real-time control and alerts. This will take time. The impact is significant in Q2 but should lessen in Q3 and continue to improve. While I can’t say exactly when the issue will be fully resolved, this is something SMIC will overcome. Our price competitiveness remains strong relative to peers. Our prices fluctuate less. Our pricing does not drop more than the industry average. There’s been no large-scale delay due to price cuts. We haven’t slashed prices aggressively. That’s not the situation here.

[Interpreted] Your next question comes from Ziyuan Wang of Citic Securities.

My first question: it sounds like the ASP situation is more short-term and less about competitiveness. Is that a correct understanding? What’s your view on wafer foundry price competition and future ASP trends?

Yes, following the Q1 exchange, there was a specific event that caused some volatility. That volatility affected part of Q1 and most of Q2. Fluctuation is already improving. To your first question, SMIC’s ASP won’t be significantly higher than the industry average, but it won’t fall below comparable peers either. Our ASP is healthy, sustainable, and acceptable to our customers. We’re not undercutting prices just to gain market share. Instead, our ASP strategy is based on reasonable, long-term agreements with clients. As we gradually move past the disruptions from Q1, we’ll return to stable and sustainable ASP. Just now, I also mentioned that we all see the opportunity for SMIC's customers to gain a larger share in the market in the future. This relates to the redistribution of the supply chain where they may have had no share or only a small share. They may now obtain a share that gradually increases. A long time ago, I shared with you that within our industry chain covering mobile phones, automotive, industrial, consumer, Internet, PC, and so on, we believed that at least one-third should be handled by China’s local OEM industry. Now, it seems that if we are competitive, with excellent quality, very competitive pricing, and a full platform offering, then having a 50% share in some product categories is also a reasonable target. However, even with the domestic production capacity that has already been established and all SMIC’s plans, the actual figures remain very low—lower than the 30% I just mentioned. There is still opportunity for development in the future. When we see this opportunity, others see it as well. We do not want future development in the industry to be marked by excessive competition. Instead, we aim to deliver earlier than others, offer a wider variety of brands, more competitive pricing, better quality, and forge stronger ties with customers. This approach will enable our expansion to be sustainable and based on healthy pricing. Leading companies in the industry have done well in this regard. We intend to follow suit. SMIC's future development is not dependent on lowering ASP or cutting prices to win orders.

My second question is about the tablet and computer categories. In Q1, revenue from those categories declined slightly. How do you interpret that? Looking ahead, which sub-product categories do you think will show stronger demand and which will be weaker?

For the computer segment, there was an expectation that cell phone shipments would grow by double digits this year and computers would also see significant growth. We prepared a large amount of inventory. However, it appears that the projected total cell phone shipment volume for the year needs to be revised downward. By July, August, or September, we’ll likely realize that full-year growth won’t be as strong as expected. Targets will be revised accordingly. This will lead to lower demand than anticipated and prices may also decline. Second, for the PC segment, computer sales are still doing well. They’re stable and continue to sell. But growth is not significant. Inventory levels are about the same. If prices drop slightly, further inventory movement can occur. However, if prices do not decline, then order volumes are expected to fall. For tablets, the sales of tablets, TVs, pads and laptops are not declining. The demand is there, but supply is increasing. The industry is seeing a downward movement in prices. SMIC is in the middle of it, and customers have previously spoken of the principle that if our customers' market share is lost, SMIC will also face price competition with the customers. But we will not take the initiative to lower the prices for a larger market share. This is mainly oversupply of capacity. This year’s computer inventory is almost sufficient. If we want to prepare for more inventory, only lower prices will increase the amount of inventory. It is pure market behavior.

[Interpreted] Thank you all for your questions. 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 first 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.]