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SMIC Q1 2026 Earnings Live Broadcast

[AI Key Points Summary]

Financial performance

- First-quarter revenue was $2.505 billion, a sequential increase of 0.7%

- Gross margin was 20.1%, up by 0.9 percentage points sequentially

- Operating profit was $248 million, with net profit attributable to the company at $197 million

- Total assets of 55 billion USD, cash funds of 13.9 billion USD, and a debt-to-equity ratio with interest at 40.5%

Business Progress

- Added nearly 9,000 wafer capacity in the first quarter, with an overall utilization rate of 93.1%

- Revenue from 8-inch wafers increased by 6% sequentially, with revenue from BCD, logic, and embedded memory all seeing sequential growth

- Established an advanced packaging research institute and a new subsidiary, Shanghai New Dimension Semiconductor, to expand into advanced packaging operations

- Comprehensive automotive-grade process coverage across multiple fields including logic, analog, and BCD

Guidance for next quarter’s performance

- Projected sales revenue to increase by 14% to 16% sequentially in the second quarter

- Gross margin expected to be between 20% and 22%, two percentage points higher than the previous quarter’s guidance

- Both shipment volume and average selling price are expected to see significant increases

Opportunity

- Artificial intelligence directly drives strong demand for power management and data transmission chips, with the company’s power management chip capacity in short supply

- Overseas artificial intelligence siphoning effect prompts consumer and IoT clients to seek capacity within mainland, leading to order inflows

- Artificial intelligence is driving demand for new applications such as electric vehicles and robotics, with local companies actively expanding into the market

- The push for localization across the industrial chain is driving new domestic clients in sectors such as logic and networking

[AI Conference Record]

Operator

Welcome to SMIC's first quarter 2026 earnings conference call. Today's meeting will be simultaneously live-streamed over the web and telephone. Please note that if you join by phone, your line will be in listen-only mode. After management’s presentation concludes, we will move to a Q&A session, during which instructions on how to participate will be provided.

Welcome to Semiconductor Manufacturing International Corporation's first quarter 2026 webcast conference call. Today's call will be simultaneously streamed through the Internet and telephone. Please be advised that if you join the meeting by phone, your dial-in is in listen only mode. However, after the conclusions of the management's presentation, we will have a question and answer session. At that time, you will receive instructions on how to participate.

Now, let us invite Senior Vice President and Board Secretary Miss Bo Guang Li to host the webcast.

Guo Guanglü

Hello everyone, welcome to SMIC's first quarter 2026 earnings conference call. Joining today’s call are Dr. Zhao Haijun, Co-Chief Executive Officer, and Dr. Wu Junfeng, Senior Vice President and head of finance.

Greetings. Welcome to SMIC first Quarter 2026 Webcast Conference Call. Attending today's call are Doctor Zhao Haijun, Co-Chief Executive Officer, Doctor Wu Junfeng, Senior Vice President and person in charge of Finance.

We would like to remind everyone that today’s statements include forward-looking information, which reflects expectations for future performance but is not guaranteed, and is subject to inherent risks and uncertainties. Please refer to our earnings release for details regarding these forward-looking statements. Unless otherwise specified, all financial data presented during this earnings call is based on International Financial Reporting Standards, and currency amounts are expressed in US dollars.

Let me remind you that today's presentation contains 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 statement in our earnings announcement. Please note that today's earnings statement is presented in accordance with International Financial Reporting Standards IFRS and currency figures are U.S. dollars unless otherwise stated.

Now I'd like to invite Doctor Wu Junfeng to introduce the company's financial status.

Wu Junfeng

Hello everyone. I will report our unaudited results for the first quarter of 2026 followed by our guidance for the second quarter.

The first quarter results were as follows. Revenue was 2505 million, up 0.7% sequentially. Gross margin was 20.1%, up 0.9 percentage points sequentially. Profit from operations was 248 million. EBITDA was 1435 million. EBITDA margin was 57.3%. Profit attributable to the company was 197 million.

Balance Sheet: At the end of the first quarter, the company had total assets of 55 billion, of which total cash on hand was 13.9 billion, total liabilities was 19.2 billion, of which total debt was 14.5 billion, total equity was 35.8 billion, debt to equity ratio was 40.5% and net debt to equity ratio was 1.8%.

Regarding cash flow, in the first quarter, net cash generated from operating activities was 685 million, net cash used in investing activities was 1697 million, and net cash generated from financing activities was 2365 million.

Cash flow: in the first quarter, net cash generated from operating activities was 685 million. Net cash used in investing activities was 1,697 million. Net cash generated from financing activities was 2,365 million.

For the second quarter of 2026, our guidance is as follows. Revenue is expected to grow by 14% to 16% sequentially, with gross margin anticipated to be between 20% and 22%.

For the second quarter 2026, our guidance is as follows. Revenue is expected to increase by 14% to 16% sequentially and gross margin is expected to be in the range of 20% to 22%.

The following is an explanation of matters related to the company’s 2025 annual report. According to the relevant regulations of the Shanghai Stock Exchange, if a listed company has made a profit during the annual reporting period and its accumulated undistributed profits are positive but no cash dividends have been distributed, the company must provide detailed explanations on matters related to the cash dividend plan during the earnings release conference, which takes place after the disclosure of the annual report but before the record date for the annual general meeting.

This concludes the financial status. Next, let me recap the relevant matters related to the company's 2025 annual report. 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 key explanations on matters related to the cash dividend plan in earnings conference, after the disclosure of the annual report and before the record date of the annual general meeting.

The company's free cash flow, after deducting capital expenditures from operating cash flow, remains negative, indicating that the company is still in a crucial phase of capacity expansion and increasing market share. Continued investment in capacity construction and R&D activities remains essential, roughly equivalent to the previous year. Under this investment plan, priority must be given to funding core operations such as capacity building and R&D activities. This will help enhance the company's core competitiveness and value, ensuring it maintains a leading position in fierce market competition, thereby maximizing protection for investors' rights.

In 2025 the company's free cash flow after deducting capital expenditure from operating cash flow remained negative. This indicates that the company is currently still in a pivotal phase of capacity expansion and consistently growing market presence, and the company still requires ongoing capital investment for both capacity construction and R&D activities. For 2026, the investment plan is largely unchanged from the previous year. Under this investment plan, prioritizing allocation to its core operations including capacity expansion and R&D remains essential.

Therefore, the company has decided not to implement profit distribution for the 2025 fiscal year. This arrangement better aligns with the company's long-term development needs and shareholders' fundamental interests, and complies with relevant laws, regulatory documents, and the company’s profit distribution policy, without harming shareholder or company interests. The proposal has been reviewed and approved by the Board of Directors and disclosed in the annual report, and will subsequently be submitted for review at the annual general meeting. We sincerely thank all shareholders for their understanding and support.

This will enhance the company's core competitiveness and value, solidify its leadership in fierce market competition and so as to protect investor interest to the maximum degree. Thus, the company plans not to distribute profits for the year 2025. This decision better aligns with the company's sustainable development objectives and shareholders' fundamental interests. And is in accordance with relevant regulations, regulatory documents and the Company's profit distribution policy as well. There are no circumstances that harm the interests of the Company and its shareholders. The plan has been reviewed and approved by the Board of Directors and disclosed in the Annual Report and will be submitted for approval at the Annual General Meeting. We extend our sincere appreciation to shareholders for your understanding and support.

Guo Guanglü

Thank you, Dr. Wu. Next, let's invite the co-CEO, Dr. Zhao Haijun, to introduce the operational situation.

Thank you, Doctor Wu. Next, I will hand the call to Doctor Zhao Haijun.

Zhao Haijun

Hello everyone, welcome to SMIC's first-quarter 2026 earnings briefing.

Hello everyone. Thank you for attending SMIC's first quarter 2026 earnings call.

The company achieved revenue of $2.505 billion, a 0.7% increase from the previous quarter. By service type, wafer revenue accounted for 93.9% of total revenue, with an amount increase of 2.3% sequentially. Among this, shipment volume declined by 0.2% sequentially, while the average selling price of wafers increased by 2.5%, mainly due to stable and slightly rising foundry prices for certain products in the company's advantageous niche markets.

In the first quarter the company realized revenue of 2505 million, a sequential increase of 0.7%. By service type, wafer revenue accounted for 93.9% of total revenue, with a sequential increase of 2.3% in amount. Among that, the shipment unit decreased by 0.2%, while the blended wafer price increased by 2.5%, mainly due to the steady and rising prices for certain products in the company's advantageous segmented markets.

In the first quarter, the company added nearly 9,000 units of 12-inch equivalent capacity, and the overall utilization rate dropped by 2.6 percentage points sequentially to 93.1%. There were two main reasons: First, affected by the AI siphon effect, mobile phone manufacturers worried about insufficient supply of supporting memory chips and cut orders in the fourth quarter of last year, which partially impacted the first quarter. Second, in the first quarter, a new factory was in its start-up phase, and its capacity was included in the denominator of the utilization rate calculation.

In the first quarter, the company added close to 9000 12-inch equivalent capacity and overall utilization rate decreased by 2.6 percentage points sequentially to 93.1%. There were two main reasons. First, affected by the AI siphon effect in the fourth quarter of last year, mobile phone manufacturers worried about insufficient supply of supporting storage chips and reduced orders, which was partially transmitted to the first quarter this year. Second, in the first quarter we have new fab in start-up phase, which capacity was newly added into the denominator of the capacity utilization rate.

Looking at the company’s revenue distribution by region in the first quarter, the proportions for China, the US, and Eurasia were 89%, 9%, and 2%, respectively. In terms of amounts, revenue from China grew by 2% sequentially, reflecting ongoing impacts of supply chain restructuring. For wafer revenue by size, 12-inch and 8-inch wafers accounted for 76% and 24%, respectively. The revenue from 8-inch wafers increased by 6% sequentially, primarily driven by strong demand for AI-related companion chips and spillover pressure on other production capacities, resulting in more orders received by the company and tight capacity supply. Revenue from BCD, logic, and embedded memory all saw sequential growth.

In the first quarter, in terms of the company's revenue by region, China, America, and EU Asia accounted for 89%, 9%, and 2% respectively. The revenue from China increased by 2% sequentially, continuously demonstrating the industrial chain reshuffling effect. By size, wafer revenue from 12-inch and 8-inch wafers accounted for 76% and 24% respectively. The wafer revenue from 8-inch wafers increased by 6% sequentially, mainly because the company has secured incremental orders driven by strong demand for AI supporting chips and capacity supply constraints in other application sectors. Our capacity could not fully meet the demand. BCD, logic, and embedded memory businesses all achieved quarter-on-quarter growth.

In terms of application, the revenue contribution from smartphone, computer and tablets, consumer electronics, connectivity and IoT, industrial and automotive was 19%, 14%, 46%, 7%, and 14%, respectively. In response to market changes, the company allocated more capacity to high-demand platforms such as BCD and memory, driving sequential revenue growth of 18% for computers and tablets, and industrial and automotive sectors, while smartphone revenue decreased by 10% sequentially.

By application, wafer revenue from smartphones, computers and tablets, consumer electronics, connectivity and IoT, industrial and automotive accounted for 19%, 14%, 46%, 7%, and 14%, respectively. The company allocated more capacity to high-demand platforms such as BCD and memory to adapt to market changes, resulting in sequential revenue growth of 18% for computers and tablets, and industrial and automotive sectors. Revenue from smartphones declined by 10% sequentially.

The gross margin in the first quarter was 20.1%, up by 0.9 percentage points sequentially, mainly due to an increase in selling prices and optimization of the product mix.

In the first quarter, the company’s gross margin increased by 0.9 percentage points to 20.1%, mainly due to higher pricing and improved product mix.

Given the current situation, for product categories facing shortages, the company has negotiated price increases with customers, and this effect will gradually become evident. Additionally, some customers, concerned about potential uncertainties in the external environment that may lead to supply tightness and further drive up supply chain prices, have pre-stocked consumer and IoT products. This has resulted in the company having ample orders on hand.

Given the current conditions, the company has negotiated a price increase with customers for product categories that are in short supply, and the effect will be gradually reflected. In addition, concerned that uncertainty in the external environment may lead to short supply and further push up supply chain prices, some customers have built inventory for consumer and IoT products in advance. Therefore, the company has sufficient orders in hand.

Taking into account the above factors, for the second quarter, the company forecasts revenue growth of 14% to 16% sequentially, with expected noticeable increases in both shipment volume and average selling price. The gross margin is projected to be in the range of 20% to 22%, representing a two-percentage-point increase from the previous quarter’s guidance, mainly due to higher average selling prices.

Combining the above factors, in the second quarter, revenue is expected to grow by 14% to 16% sequentially, with meaningful improvements in both shipment units and blended ASP. Gross margin is forecasted to be in the range of 20% to 22%, reflecting an increase of two percentage points compared to the previous quarter’s guidance, primarily driven by an increase in blended ASP.

The recent surge in AI has directly driven demand for power management and data transmission chips, while squeezing the supply of NOR Flash and SLC NAND memory capacity. This has led to robust demand for the company's standalone flash memory process platform and analog process platform. The company’s automotive-grade process layout is comprehensive, covering logic, analog, BCD, embedded memory, standalone flash memory, display drivers, image sensors, and power devices. After years of refinement, these offerings are gradually ramping up in volume, especially the automotive-grade analog BCD platform, which sees strong demand and full order books.

In terms of product platforms, the company has continued to strengthen its layout. Over the past two years, the AI boom has directly driven the demand for power management and data transmission chips, while squeezing the capacity supply for NOR Flash and SLC NAND flash. Therefore, at present, the company's stand-alone flash platform and analog platform are seeing strong market demand. The company has a comprehensive layout of automotive-grade processes covering logic, analog, BCD, embedded memory, stand-alone flash, display drivers, image sensors, power devices, and more. After years of technical refinement, automotive-grade products have gradually ramped up. In particular, the automotive-grade analog BCD platform is seeing strong market demand with a solid order book.

The company's top-tier products are widely used in automotive lidar and handheld imaging equipment. In the display sector, emerging products such as AI glasses leverage the company’s ultra-low power logic process platform, providing wired and wireless connectivity solutions for both cloud AI and edge AI applications.

The company's top products have been widely applied in automotive lidar and handheld imaging devices. The company's micro OLED platform has been adopted in emerging display products such as smart head-mounted displays and AI glasses. The company's ultra-low power logic process platform provides wired and wireless connectivity solutions for both cloud AI and edge AI applications.

Based on customer demand and orders in hand, compared to last quarter, the company is more optimistic about its overall business operations for this year. This optimism stems from several factors: First, strong AI-driven demand for supporting chips has led to a shortage of the company’s power management chip capacity. Second, the overseas AI siphon effect has prompted consumer and IoT customers to seek capacity in mainland China, leading to order returns. Third, AI has driven demand for chips in emerging fields such as electric vehicles and robotics, with local companies actively exploring these markets. Fourth, the push for localization has increased demand for domestic logic and network chips. Lastly, price increases and concerns over future supply shortages have prompted customers to stockpile inventory earlier than usual.

Based on customer demand and orders in hand, compared to last quarter, we are more optimistic about our overall business performance for this year. The main reasons are as follows. First, strong demand for supporting chips from AI has directly pushed up demand for the company's power management capacity which is now in shortage. Second, driven by overseas AI siphon effects, customers in consumer and IoT fields are trying to secure capacity in mainland China, with orders flowing back to domestic. Third, AI has also driven demand for chips in emerging fields such as electric vehicles and robots, where local companies have actively explored markets. Fourth, the appeal for localization promoted the demand for domestic logic and network chips. The fifth reason is the price increase effects and customers' earlier inventory building on concerns over insufficient supply in the future.

Amid changing market conditions, the company's strengths in technological reserves, diversified platforms, and flexible capacity conversion have supported its ability to take on orders. We have shifted production capacity to continuously iterated products such as logic, specialty memory, power management, analog platforms, high-precision ADC converters, and micro OLED. The company continues to expand capacity, sign long-term agreements with customers to lock in future demand, thereby generating steady growth momentum.

As mentioned before, under the backdrop of the market changes, the company's advantages of technological reserves, diversified platform layouts and flexible capacity conversion support its order-taking capability. We have shifted the capacity to continuously iterated products such as logic, specialty memory, power management, analog platforms, high-precision ADC products, micro OLED and etc. The Company continues to promote capacity expansion, sign long-term agreements with customers to lock in future demand and thereby generate steady growth momentum.

The global macro environment still faces numerous uncertainties, posing ongoing challenges to supply chain costs, stability, and market expectations. Drawing on years of accumulated experience, we will continue to strengthen the resilience of our supply chain management, adopt multi-channel procurement strategies, and make every effort to minimize impacts. At the same time, the company will closely track customer demand, flexibly allocate resources, accelerate product response times, and ensure high-quality delivery even in a complex environment.

The global macro environment is still confronted with numerous uncertainties, which continue to pose challenges to supply chain costs, stability and market expectations. Leveraging our experience gained over the years, we will continue to strengthen the resilience management of our supply chain, adopt multi-channel procurement strategy and make efforts to mitigate the adverse impacts. At the same time, the company will closely monitor customer demand, flexibly allocate resources, accelerate product response speed and ensure sustained high-quality delivery amid a complex environment.

The company places great importance on market capitalization management and formulated and implemented a market capitalization management system in the first quarter of 2025. Over the past year, the company has continued to focus on its core business, achieving new milestones in operating performance. It has consistently advanced technological breakthroughs, collaborated with the industry chain for joint development, strengthened talent team building, fully promoted green and sustainable development, and deepened two-way communication between investors and the company. Through various online and offline methods, the company has actively communicated its value to the capital markets.

Regarding the company's market value management over the past year, the company placed significant emphasis on market value management and established a market value management system in the first quarter of 2025, executing it accordingly. Over the past year, the company has remained focused on its core business and reached a new milestone in its operating performance, continuously advanced technological breakthroughs, promoted coordinated development across the industrial chain, further strengthened its talent pool, fully promoted green and sustainable development, and deepened mutual communication between investors and the company, proactively conveying the company's value to the capital market through a variety of online and offline channels.

Finally, I would like to thank all customers, suppliers, investors, and the community for your understanding and strong support. Thank you all.

Finally, I would like to thank all customers, suppliers, investors and the community for your understanding and strong support. Thank you all.

Guo Guanglü

Thank you, Dr. Zhao. Next, we will move into the Q&A session, where questions will be answered by Dr. Zhao and Dr. Wu. Questions in Chinese will be answered in Chinese, and questions in English will be answered in English. Each questioner may ask up to two questions.

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

Operator

Thank you. As a reminder, if you'd like to ask questions, please press *1 and wait for a name to be announced. To cancel your request, please press *1 again. Our first question comes from the line of Le Ping Huang of Hua Tai Securities. Please ask your question.

Leping

Hello, Mr. Zhao, congratulations on the company's excellent performance. We noticed that the revenue guidance and gross margin guidance for the second quarter are significantly higher than market expectations and those of major domestic and international competitors. You mentioned AI-related chips several times earlier. Could the company elaborate further on what specific products these include? Also, what technical platforms and customer advantages does SMIC possess that allow it to seize this wave of new demand for AI-related chips, resulting in performance that is clearly better than its peers?

And we also feel that under the situation where the company is currently facing tremendous depreciation pressure, it's very challenging to achieve an increase in gross margin this time. So how do we see whether the gross margin will continue to rise in the next few quarters? Thank you.

Zhao Haijun

Alright, Leping, thank you for your question. For the first question, everyone is talking about GPUs when it comes to artificial intelligence. But regarding the supporting chips on the GPU board, what we see now related to SMIC is that we don't make the main chips, but in terms of power management, power supply, data transmission, and data driving, we still have a large number of customers working in this area, and they hold a significant market share in the mainstream market.

As this demand increases, these products are actually in short supply now. SMIC is limited by its own production capacity, so now it mainly reallocates capacity to support this part. This is the first thing we see, the demand for artificial intelligence and the boost to SMIC that you just asked about.

Secondly, as mentioned earlier, ToF or robots, home appliances, etc., which we see now, people are starting to use something we call edge-side artificial intelligence. In this area, everyone is doing their best, and there are many logic circuits emerging. This time, we didn’t provide a detailed report on our product classification; we only reported on the application scenarios, such as automobiles and mobile phones. Actually, in terms of product scenarios, we see a significant increase in demand for logic circuits from numerous clients.

Just like a few years ago, we saw many small companies start to focus on BCD, power supply, and power management. Now, we see logic companies focusing on these areas. These two areas directly place orders with us related to artificial intelligence. Leping, that’s the first point.

The second question you asked is about seeing growth in the gross margin. In our report just now, we mentioned strengthening in two areas. The first is that SMIC is still the leading company in some niche markets, with comprehensive technology, early cooperation with clients, and the quality and performance of our platform products are currently better than others. In these areas, we are increasing more orders here, which means the percentage of high-priced and quality products has increased.

On the other hand, in response to market demand, we negotiate with clients, and prices have been continuously adjusted upwards. The effects of higher prices or price increases are gradually becoming apparent. We are different from other companies; our industry peers might suddenly announce a price hike one day. However, we have long-term contracts with many clients, so we need to negotiate. Therefore, the timing of our price increases varies, but overall, it was significantly reflected in the second quarter. We believe this effect will continue to increase and be more evident in the third and fourth quarters.

However, let me mention one thing. At the beginning of the year, we said that SMIC's depreciation expenses would increase by about 30% compared to last year. So, the factors of price increases, a higher proportion of high-end quality products, and the increase in depreciation all have a combined effect. Therefore, we strive to maintain a steady increase in our gross margin, which is just an effort. Alright, Leping.

Leping

Then let me ask my second question about the impact of the long cycle of storage. I remember last quarter, Mr. Zhao, you predicted that the supply-demand imbalance would hopefully ease by the third quarter. Now that another quarter has passed, based on your communication with customers, do you feel that end users have become accustomed to the current high storage prices? Has their willingness to place orders improved marginally?

Also, we see that many storage manufacturers are shifting their product lines towards higher-end products and continuously exiting niche markets. I remember the company has a special memory business. As a globally competitive specialty memory foundry, I wonder what plans the company has for this area. Will it increase investment to fill the gap in this market? Thank you.

Zhao Haijun

Alright, Leping. First, to answer: previously, based on the pace of equipment procurement, if you ordered around ten machines, they would quickly deliver two or three to you, while the rest would be delivered at an average or slowest pace, with a certain percentage allocated accordingly. Based on those calculations, the delivery time for standard memory products to come online for consumer goods, which have lower quality and validation requirements, should start showing up in the market within nine months.

I believe that capacity should already be reflected on production lines now. But if you ask whether the market has loosened up since our last forecast until now, I haven't seen any loosening yet, and we haven’t reached the third quarter. There are possibly two reasons: one is that the development of AI industries has exceeded our forecasts from the fourth quarter of last year. At that time, we thought the existing capacity could meet demand, such as building a certain number of supercomputing centers to satisfy needs for a period of time. However, that plan seems to be expanding now, beyond what was originally predicted.

The second reason is that intermediaries are still holding onto their inventories without releasing them, and may even be increasing stockpiles. This is our guess; we don't have much data on this. The question you just asked is actually related to this issue. For companies like SMIC, when the entire market for specialized memory is squeezed, many original IDM players no longer produce. For instance, specialized SLC NAND Flash—there is not enough NAND Flash capacity now.

Under these circumstances, both the general-purpose and specialized supply chains are tight. SMIC is also ramping up capacity. Our characteristics differ somewhat from others. When we develop specialized memory, 90% of our equipment and processes are compatible with the logic circuits we've already built. We only need to add about 10% specialized equipment to switch the entire production line over. That's where SMIC's flexibility lies.

The problem we're encountering now is that when we try to switch over, the capacity for existing logic circuits, MCUs, CMOS image sensors, etc., is fully utilized, so we can't shift everything over immediately. We need to rely on expanding overall capacity. Only after total capacity increases will we be able to divert some capacity to produce these specialized memory chips. All of this is proceeding steadily. Each quarter, the percentage of specialized memory we produce is increasing compared to the previous quarter, responding to customer demands. However, the current situation remains one of undersupply, and we can't meet all customer needs at once. Leping, that’s my response.

Leping

Okay, thank you very much.

Guo Guanglv

Thank you for your question.

Operator

Thank you for the question. One moment for the next question. The next question comes from the line of Ziyuan Wang of Citi Securities. Please go ahead.

Ziyuan

Alright, thank you, and congratulations on our excellent performance. My first question is regarding our company’s establishment of an Advanced Packaging Research Institute and a subsidiary, Shanghai New Dimension Semiconductor, in the first quarter, which has also been reported by the media. On the other hand, we have noticed that some domestic competitors are also positioning themselves in advanced packaging. What are the company’s plans regarding process layout in advanced packaging, 3D integration, and 2.5D integration? And how do we consider the future? Thank you.

Zhao Zhonghai

Thank you, Ziyuan, for your question. First of all, SMIC did not just start working on packaging and advanced packaging recently; we actually began this effort 11 years ago. In 2015, SMIC started to lay out its strategy for packaging and advanced packaging. As you know, we heavily invested in JCET, the largest domestic player in the sector, becoming their major shareholder. The two companies collaborated extensively and later established a joint venture outside of the main company structure, specializing in 12-inch packaging and 2.5D packaging.

However, given the rapid pace of SMIC's development, we have largely paused these external efforts, focusing instead on fulfilling the packaging needs of our internal clients within SMIC’s front-end factories. Over the past decade, we have continuously worked on 3D CIS bonding and packaging. It is well known that we are one of the key international players using advanced packaging to produce image sensor products. Specifically, we bond a CMOS image sensor with a standard logic component, known as the ISP (Image Signal Processor), through back-end processing.

This bonding initially involved larger TSV packaging, but gradually became smaller. For more than ten years, SMIC has provided interposers to external advanced packaging plants. Now, due to new customer requirements, SMIC is making an overall plan to meet those demands.

Recently, we have mainly implemented two initiatives. One is the establishment of an advanced packaging research institute, primarily aiming to deepen our understanding of the development trends in cutting-edge technologies. Additionally, we have established a new three-dimensional division to build corresponding production capacity to meet the needs of SMIC's existing customers. The company will also closely monitor opportunities in this industry and align tightly with the demands of SMIC's clients to flexibly advance relevant business layouts and resources. That is our response.

Ziyuan

Okay, thank you, Mr. Zhao. My second question is about the current ranking of various technology platforms by market demand. Which platforms can interchange their capacities? Also, you specifically mentioned the ToF platform earlier, which we haven't discussed before. Could you introduce this ToF platform?

Zhao Haijun

Alright, understood. SMIC and the foundry industry are similar. When establishing a new factory, we must initially meet the requirements already present in the market. At the start of Moore's Law, standard logic circuits were the first to appear and mature, then after a couple of years, they moved to the next node. When SMIC builds new or previous capacities, it often lags behind the leading international timeline of Moore’s Law, so by the time we enter, we still focus on logic circuits, but the orders and prices for this segment alone cannot support the entire new factory’s growth.

Therefore, we quickly need to expand into its derivative products and embedded products. Generally, the first wave focuses on standard logic circuits that require speed. The second wave involves ultra-low power consumption where speed is not critical, but low power usage is essential. Then, people add 5% to 10% analog circuits, typically for networking and RF applications. Afterward, embedded systems are integrated, including high-voltage components for high-voltage drive, BCD for power, and optoelectronics for sensing.

The ToF you just asked about actually involves integrating optical detection devices and high-performance amplification to make it work. This part has recently emerged domestically. Everyone knows that electric vehicles or robots’ vision systems require ToF. Of course, some sensors used in smartphones activate various functions when you pick up the phone and bring it close to your ear—some are quite complex.

Currently, in the sensor section of smartphones, the distance measurement in cars, and the visual application in robots, things are slightly mixed as the field is still in the startup phase. However, we believe this is a promising application area. SMIC has spent a long time working with customers to debug devices and develop products, and now we are seeing an increase in volume.

Ziyuan

Understood, okay, thank you very much, Mr. Zhao, for the clear explanation.

Operator

Thank you for the questions. One moment for the next question. Our next question comes from the line of Yikang Zhang from CICC. Please ask your question.

YiKang

Can you hear me? Thank you for giving me the opportunity to ask a question. Hello, President Zhao, and hello to all management. I have two questions. The first one is about the global capacity squeeze. I would like to ask whether the company currently has any overseas customers shifting production here due to the trend of local-for-local and the effect of the global capacity squeeze? Additionally, how do you see the evolution of this capacity squeeze trend, and how long do you think it will last? Including at present, what percentage of our total demand can it account for? That's my first question. Thank you.

Zhao Haijun

Thank you for your question. What we are seeing now in terms of the global squeeze is mainly because AI requires a lot of capacity, and possibly its profit margin is also relatively high. Therefore, foundries within our industry as well as IDMs in the semiconductor sector have shifted their capacities and factories to focus on AI-related or memory IDM-related products. As a result, the available capacity for standard products or existing products that were previously manufactured by foundries has significantly decreased.

This means that some of the manufacturing that was previously done overseas no longer exists there. On the other hand, the construction of semiconductor capacity within China remains relatively robust. Only these places still have available capacity. Hence, we are seeing many overseas customers moving their orders to be manufactured domestically in China. As the largest domestic foundry, SMIC is likely receiving the most orders across the board.

Recently, everyone has seen news online where even the world’s largest product companies are seeking new foundries to sign contracts with, which shows that capacity allocation in the mainstream factories may not be as secure as before and might get reduced. This is part of the capacity compression effect.

We are also seeing memory manufacturers who used to produce specialized products now announcing that they will either stop producing legacy products or declare those older products as End-of-Life (EOL) and cease production altogether. As a result, companies that rely on these niche and diverse NOR flash and NAND flash products have suddenly entered a state of panic because such products will no longer be available in the future. These products are primarily produced by mainstream manufacturers domestically in China, with SMIC being the leading producer.

In our view today, the squeezing effect has not yet reached its most severe point because we see that this year’s data center investments might only be around 600 billion US dollars, but next year it could reach 1 trillion US dollars or more. We can predict that within conventional capacities, since such capacities have not increased significantly, with next year bringing an increasing demand for main AI chips and more edge applications, there may be further squeezing of non-AI related capacities.

In that case, we believe this trend is long-term. There are reports suggesting it will continue all the way to 2030. We can't look that far ahead, but for this year and next, the overall trend we see is a large-scale return of production. We have observed significant returns in logic circuits and other types of circuits, as well as mobile phone circuits. This is because, during this period of artificial intelligence, products like mobile phones, computers, edge computing circuits, IoT, and network communication categories are likely to see reduced production capacity. China's production capacity is growing rapidly and substantially, and it can accommodate many of these returning orders.

YiKang

Alright, thank you, Mr. Zhao, very clear. The second question might be related to the acquisition of minority stakes in SMIC Northern. I would like to ask where we currently stand with that? And regarding this quarter’s profits, are they accounted for at 100% or only 51%? Additionally, when do we expect to complete the full integration? Could you share which quarter this might happen?

Wu Junfeng

Thank you for your question, Yi Kang. Regarding the progress of the equity acquisition of SMIC Northern, on May 11th, we received approval from the SSE's M&A Restructuring Committee. It has now been submitted to the CSRC for registration. However, the timing of when the registration will be approved remains uncertain. Therefore, for the first quarter, the profits of SMIC Northern are still included in our attributable net profit at 51%.

Once the registration is approved and the transaction is completed, SMIC Northern's profits will be fully integrated into our attributable net profit at 100%. The entire acquisition of SMIC Northern's shares will benefit our attributable net profit, earnings per share, return on net assets, and other financial metrics. All these indicators will improve as a result.

YiKang

Alright, thank you, Mr. Wu. I have no further questions.

Operator

Thank you for the question. Please hold for the next question. The next question comes from the line of Kuaijian of Guotai Junan Securities. Please go ahead with your question.

Quickview

Hello to all the leaders, and thank you for giving me this opportunity to ask a question. From what I've observed, in the past period, as Mr. Zhao mentioned earlier, overcapacity issues have indeed occurred in quite a few industries. As a result, many companies, whether IDM firms or foundries, have raised prices. You also just mentioned that overall, the company is in a situation of supply falling short of demand.

As the proportion of the company’s production shifting from 8-inch to 12-inch wafers is increasing, we have done some calculations and found that revenue from 8-inch wafers still grew by 6% quarter-on-quarter in the first quarter. I would like to ask, is this mainly due to an increase in unit price, or is it driven by both volume and price? Additionally, regarding 8-inch wafers, we have noticed that some upstream suppliers, such as silicon wafer manufacturers, seem less optimistic about the market outlook. Therefore, I’d like to ask about the future trend for 8-inch wafers—specifically regarding demand, pricing, and other related aspects. That is my first question. Thank you.

Zhao Haijun

Alright, thank you, Quickview. I’ve reported this several times during these meetings: SMIC's 8-inch capacity has been fully utilized since around the second quarter of last year up until now. We haven't expanded 8-inch capacity; instead, we've focused on two things. The first is product mix optimization. If certain analog circuits require very few layers but occupy a lot of bottleneck equipment time, we discuss with our clients—either they pay higher prices, or we produce less, because these products consume a relatively large amount of capacity. This process is generally referred to as product portfolio optimization, and that’s how we handle it.

The second thing is that based on market dynamics and our customers’ competitiveness in the market, we work together with them to adjust prices upwards. These two measures combined explain the 6% growth you observed, which is primarily driven by price increases.

Quickview

Alright, thank you, Mr. Zhao.

Zhao Haijun

Quickview, you just asked how long this can last. In fact, globally, the utilization rate of 8-inch capacity isn’t particularly high. There are two unique factors here for SMIC. First, SMIC’s 8-inch facilities were built later and thus have newer equipment, making them highly competitive. Secondly, we are more specialized. When we built this capacity, it wasn’t for standard logic circuits; instead, we designed it according to specific client needs. We didn’t build capacity that wasn’t required by clients. Therefore, most of this capacity is used for applications demanding high quality, cutting-edge performance, and advanced technology.

The demand in these areas, as I mentioned earlier, is mainly the direct demand within artificial intelligence construction, rather than the indirect demand resulting from squeezed capacity, which is minimal. The primary driver is direct demand. We observe that this direct demand increases with different quarters. If the budgets and forecasts for AI globally are accurate, with ongoing construction until around 2030, we believe that the demand in this area will continue to grow in the coming years rather than decline. Therefore, we are confident that the sustainability of these orders is relatively good. You may ask other questions.

See you soon

It's very clear now. My second question is about depreciation. We see that the amount of depreciation and amortization in the first quarter has increased quarter-over-quarter. However, looking at the three potential components, such as the cost component, it decreased; our R&D expenses also declined, and general and administrative expenses similarly fell. How do we interpret this trend where the total seems inconsistent with the three underlying components?

Additionally, President Zhao, you just mentioned earlier guidance indicating a 30% increase in annual depreciation. However, we observed a 26% rise in Q1. Is there any update regarding the full-year depreciation forecast? That’s my second question, thank you.

Zhao Haijun

Let me answer first, and then Junfeng can provide additional details. For SMIC, the proportion of depreciation in every dollar of sales is increasing. For instance, in Q1 last year, just before the meeting, I checked with Junfeng, and we saw it was around 37-38%. This year, however, it has already reached 44%. Hence, depreciation per unit of revenue has grown, which caused a slight decline in gross margin compared to Q1 last year.

Currently, we can maintain the gross margin at the same level or even increase it by optimizing product mix—producing less of cheaper products and more of higher-value ones—which leads to an increase in ASP. Another factor is the improvement in capacity utilization. Compared to Q1 last year, our average capacity utilization in Q1 this year increased by 3.5 percentage points, offsetting the impact of depreciation by roughly the same amount.

This aligns with the data just released. When we raise prices to generate new revenue, sometimes the price increase outpaces the additional depreciation. For example, if depreciation rises by three or four points but prices go up by six points, you'll notice a decrease in depreciation per dollar of revenue. Thus, when calculating the figures, the decline is due to the price increase. Let’s hear from Junfeng.

Wu Junfeng

Kuai Jian, you mentioned that the depreciation amount increased because we are continuously expanding production capacity, with new equipment coming online, leading to an overall increase in depreciation. However, regarding Q1’s depreciation within the cost of sales, it decreased quarter-over-quarter because, as you noticed, despite revenue growth in Q1, our shipment volume actually declined, indicating that inventory levels have increased.

Within the increase in inventory, our work-in-progress and finished goods have actually increased. Therefore, part of the total depreciation has been allocated to inventory, which has led to a relative decrease in the depreciation included in our cost of sales for the shipped products. That is the reason.

Regarding the decrease in research and development expenses you mentioned, our R&D expenses do fluctuate between quarters, which is normal. This is also related to the timing and rhythm of our R&D expense settlements. Typically, in Q4, due to the end of the year, R&D expenditures tend to be settled more intensively, while Q1 sees relatively fewer settlements. Hence, the fluctuation between quarters occurs. So in Q1, you can see that our R&D expenses decreased compared to the previous quarter, Q4.

Regarding administrative expenses, since we had a new factory in the start-up phase in the first quarter, our start-up costs decreased in Q1, leading to a reduction in general administrative expenses. Additionally, other administrative expenses, such as management fees, were affected by some delayed projects, or certain management expenses being canceled or saved, which also resulted in a decrease in general administrative expenses.

For the full year, as Mr. Zhao just mentioned, our annual depreciation increase is still on track with our previous forecast, expected to rise by approximately 30%. In the first quarter, it increased by 26%, so depreciation will continue to rise in the following quarters. Overall, we are still maintaining this forecast for the year.

See you soon

I already understand clearly, I have no further questions. Thank you.

Operator

Thank you for the question. Now I'd like to hand the call back to Miss Guo Guang Li for closing remarks.

Guo Guanglü

Thank you to everyone from all walks of life who participated in today's meeting. We appreciate your trust and support.

Thank you to all parties who attended today's conference call. Thank you for your trust and support.

SMIC's first quarter earnings briefing concludes here, thank you for your participation.

SMIC's first quarter webcast conference call concludes here. We thank you for joining us today.

More details:SMIC IR

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