SMIC Reports 2016 Third Quarter Results

SHANGHAI, Nov. 7, 2016 /PRNewswire/ --

- All currency figures stated in this report are in US Dollars unless stated otherwise.

- The consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS").

Semiconductor Manufacturing International Corporation (NYSE: SMI; SEHK: 981) ("SMIC" or the "Company"), one of the leading semiconductor foundries in the world, today announced its consolidated results of operations for the three months ended September 30, 2016.

Third Quarter 2016 Highlights

• Revenue was a record high of $774.8 million in 3Q16, an increase of 12.3% QoQ from $690.2 million in 2Q16 and an increase of 36.0% YoY from $569.9 million in 3Q15.
• Gross profit was $232.1 million in 3Q16, compared to $217.8 million in 2Q16 and $182.4 million in 3Q15.
• Gross margin was 30.0% in 3Q16, compared to 31.6% in 2Q16 and 32.0% in 3Q15.
• Net profit for the period attributable to SMIC was $113.6 million in 3Q16, as compared to $97.6 million in 2Q16 and $82.6 million in 3Q15. 
•  Return on equity was 11.4% in 3Q16, compared to 10.2% in 2Q16 and 9.3% in 3Q15.

Fourth Quarter 2016 Guidance: 

The following statements are forward looking statements based on current expectations and involved risks and uncertainties, some of which are set forth under "Safe Harbor Statements" below. The Company expects:

• Revenue to increase by 5% to 7% QoQ.
• Gross margin to range from 28% to 30%.
• Non-GAAP operating expenses, excluding the effect of employee bonus accrual, government funding and gain from the disposal of living quarters to range from $179 million to $184 million.
• Non-controlling interests of our majority-owned subsidiaries to range from positive $37 million to positive $39 million (losses to be borne by non-controlling interests).

Dr. Tzu-Yin Chiu, SMIC's Chief Executive Officer and Executive Director commented, "SMIC is seeing robust demand across the board and we reiterate our growth target of 20% compounded annual growth from 2016 to 2019. In 2016, SMIC is growing in excess of 28% YoY. We are forecasting growth for both 4Q16 and 1Q17 given current visibility. We are on track to achieve another record year of revenue and net profit attributable to SMIC.

We had a fantastic third quarter, achieving our 7th consecutive quarter of revenue growth and 18th consecutive quarter of profit. Our revenue was a record high of $774.8 million, representing a growth of 36.0% YoY and 12.3% QoQ. Our net profit attributable to SMIC was also a record high of 113.6 million, a growth of 37.4% YoY and 16.3% QoQ. This marks the first time our quarterly net profit exceeds $100 million, and the second consecutive quarter to exceed 10% ROE.

We are still experiencing robust demand from various regions, applications, and nodes, and we are addressing the demand opportunities by laying the foundation for continued growth with prudent expansion to meet customers' needs. In the last month, we announced several new fab construction projects to address our diverse demand. Actual production capacity will only be executed with careful planning to meet overlapping conditions of assured customer demand, technological readiness, and sustained profitability."

Conference Call / Webcast Announcement

Date: November 8, 2016
Time: 8:30 a.m. Shanghai time
Dial-in numbers and pass code:

The call will be webcast live with audio at http://www.smics.com/eng/investors/ir_presentations.php or http://edge.media-server.com/m/p/thpxzbvj.

An archived version of the webcast, along with an electronic copy of this news release will be available on the SMIC website for a period of 12 months following the webcast.

About SMIC

Semiconductor Manufacturing International Corporation ("SMIC"; NYSE: SMI; SEHK: 981) is one of the leading semiconductor foundries in the world and the largest and most advanced foundry in mainland China. SMIC provides integrated circuit (IC) foundry and technology services on process nodes from 0.35 micron to 28 nanometer. Headquartered in Shanghai, China, SMIC has an international manufacturing and service base. In China, SMIC has a 300mm wafer fabrication facility (fab) and a 200mm mega-fab in Shanghai; a 300mm mega-fab and a majority-owned 300mm fab for advanced nodes in Beijing; 200mm fabs in Tianjin and Shenzhen; and a majority-owned joint-venture 300mm bumping facility in Jiangyin; additionally, in Italy SMIC has a majority-owned 200mm fab. SMIC also has marketing and customer service offices in the U.S., Europe, Japan, and Taiwan, and a representative office in Hong Kong.

For more information, please visit www.smics.com.

Safe Harbor Statements
(Under the Private Securities Litigation Reform Act of 1995)

This press release contains, in addition to historical information, "forward-looking statements" within the meaning of the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements, including statements under "Fourth Quarter 2016 Guidance", "CapEx Summary" and the statements contained in the quotes of our CEO are based on SMIC's current assumptions, expectations and projections about future events. SMIC uses words like "believe," "anticipate," "intend," "estimate," "expect," "project," "target" and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements involve significant risks, both known and unknown, uncertainties and other factors that may cause SMIC's actual performance, financial condition or results of operations to be materially different from those suggested by the forward-looking statements including, among others, risks associated with the cyclical nature of the semiconductor industry, changes in demand for our products, competition in our markets, our reliance on a small number of customers, orders or judgments from pending litigation, intensive intellectual property lawsuits in semiconductor industry and financial stability in end markets, general economic conditions and fluctuations in currency exchange rates.

Investors should consider the information contained in SMIC's filings with the U.S. Securities and Exchange Commission ("SEC"), including its annual report on 20-F filed with the SEC on April 25, 2016, especially the consolidated financial statements, and such other documents that SMIC may file with the SEC or The Hong Kong Stock Exchange Limited ("SEHK") from time to time, including current reports on Form 6-K. Other unknown or unpredictable factors also could have material adverse effects on SMIC's future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this press release may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this press release. Except as may be required by law, SMIC undertakes no obligation and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise.

About Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Measures

To supplement SMIC's consolidated financial results presented in accordance with IFRS, SMIC uses in this press release non-GAAP measures of operating results that are adjusted to exclude finance cost, depreciation and amortization, income tax expenses, the effect of employee bonus accrual, government funding and gain from the disposal of living quarters. This earnings release also includes fourth quarter 2016 guidance for non-GAAP operating expenses. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with IFRS. This earnings release includes EBITDA margin and non-GAAP operating expenses which consist of total operating expenses as adjusted to exclude the effect of employee bonus accrual, government funding and gain from the disposal of living quarters. These non-GAAP financial measures are not calculated or presented in accordance with, and are not alternatives or substitutes for financial measures prepared in accordance with IFRS, and should be read only in conjunction with the Group's financial measures prepared in accordance with IFRS. The Group's non-GAAP financial measures may be different from similarly-titled non-GAAP financial measures used by other companies.

SMIC believes that use of these non-GAAP financial measures facilitates investors' and management's comparisons to SMIC's historical performance. The Group's management regularly uses these non-GAAP financial measures to understand, manage and evaluate the Group's business and make financial and operational decisions.

The accompanying table has more information and reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis because the effect of these adjustment items excluded for the purpose of non-GAAP operating expenses guidance are subject to some unpredictable conditions that cannot be estimated with reasonable certainty.

Note:
(1)      Based on weighted average ordinary shares of 42,214 million (basic) and 50,271 million (diluted) in 3Q16, 42,178 million (basic) and 46,350 million (diluted) in 2Q16, and 40,771 million (basic) and 45,020 million (diluted) in 3Q15.
(2)     Each ADS represents 50 ordinary shares.
(3)     Based on total equivalent wafers out divided by estimated total quarterly capacity.

• Revenue increased by 12.3% QoQ from $690.2 million in 2Q16 to $774.8 million in 3Q16 mainly due to 1) an increase in wafer shipments in 3Q16 and 2) the revenue contributed from the acquisition of LFoundry S.r.l ("LFoundry", the Company's majority-owned subsidiary in Italy; the Company acquired a 70% interest in LFoundry on July 29, 2016).
• Cost of sales was $542.7 million in 3Q16, up 14.9% QoQ from $472.4 million in 2Q16.
• Gross profit was $232.1 million in 3Q16, an increase of 6.6% QoQ from $217.8 million in 2Q16.
• Gross margin was 30.0% in 3Q16, as compared to 31.6% in 2Q16. The change was mainly due to 1) the receipt of insurance compensation in 2Q16 and 2) the acquisition of LFoundry in 3Q16.
• Operating expenses were $123.5 million in 3Q16, an increase of 20.6% QoQ from $102.4 million in 2Q16, mainly due to the reasons stated in Operating Expenses (Income) Analysis below.

Analysis of Revenue

Note:
(1) Including Hong Kong, but excluding Taiwan
(2) Excluding China and Hong Kong

Capacity*

Note:
* Wafers per month at the end of the period in 8" equivalent wafers, calculated on a 30-day basis for comparison purposes

• Monthly capacity increased to 390,625 8-inch equivalent wafers in 3Q16 from 339,000 8-inch equivalent wafers in 2Q16, primarily because of 1) the capacity expansion in our Shanghai 8-inch fab, Shenzhen 8-inch fab, Beijing 12-inch mega-fab and our majority-owned Beijing 12-inch fab, and 2) the acquisition of LFoundry in 3Q16.

Shipment and Utilization

Note:  
(1)  Based on total equivalent wafers out divided by estimated total quarterly capacity.

Detailed Financial Analysis

Gross Profit Analysis

• Cost of sales was $542.7 million in 3Q16, up 14.9% QoQ from $472.4 million in 2Q16.
• Depreciation within the cost of sales increased by 6.7% to $136.6 million in 3Q16, compared to $128.0 million in 2Q16.
• Other manufacturing costs within the cost of sales increased by 18.1% to $405.0 million in 3Q16, compared to $343.0 million in 2Q16.
• Gross profit was $232.1 million in 3Q16, an increase of 6.6% QoQ from $217.8 million in 2Q16.
• Gross margin was 30.0% in 3Q16, as compared to 31.6% in 2Q16. The change was mainly due to 1) the receipt of insurance compensation in 2Q16 and 2) the acquisition of LFoundry in 3Q16.

Operating Expenses (Income) Analysis

• R&D expenses increased by $17.4 million QoQ to $81.9 million in 3Q16, compared to $64.5 million in 2Q16. Excluding the funding of R&D contracts from the government, R&D expenses increased by $15.0 million QoQ to $91.5 million in 3Q16. The change was mainly due to higher level of R&D activities in 3Q16. Funding of R&D contracts from the government was $9.6 million in 3Q16, compared to $12.0 million in 2Q16.
• Other operating income decreased from $3.9 million in 2Q16 to $1.9 million in 3Q16, mainly because of lower gain realized from the disposal of certain living quarters in 3Q16.

Other Income (expense), Net

• The change in finance costs was mainly due to government funding recognized as a reduction of interest expense in 3Q16.
• Foreign exchange losses were mainly due to a devaluation of RMB against USD. Foreign monetary assets mainly consist of cash and cash equivalent and accounts receivables in RMB. Foreign monetary liabilities mainly consist of loans, short-term and medium-term notes, accounts payables and other payables in RMB.
• The change in other gains or losses, net was mainly due to 1) $2.3 million gain in 3Q16 from the fair value change, compared to $18.0 million loss in 2Q16, in respect of the cross-currency swap agreements for the purpose of hedging against the foreign exchange risk relating to the RMB denominated liabilities including bank loans, short-term notes and medium-term notes and 2) $3.4 million gain in 3Q16, compared to $3.7 million loss in 2Q16, was the fair value change recognized in relating to the put option, which was granted by Jiangsu Changjiang Electronics Technology Co., Ltd ("JCET"), to the Group to sell the shares of Suzhou Changjiang Electric Xinke Investment Co., Ltd ("Changjiang Xinke") to JCET, pursuant to an investment exit agreement entered into by SilTech Shanghai (a subsidiary of SMIC), JCET and Jiangsu Xinchao Technology Group Co., Ltd (a substantial shareholder of JCET).
• The change in share of loss of investment using equity method was mainly due to the loss attributable to Changjiang Xinke. On April 27, 2016, SilTech Shanghai entered into a disposal agreement with JCET, pursuant to which SilTech Shanghai agreed to sell the shares of Changjiang Xinke to JCET in consideration of RMB664 million, which will be satisfied by JCET's issue of 43,229,166 shares of JCET to SilTech Shanghai at RMB15.36 per share. This transaction has not closed as of the date of this earnings release and is waiting for the approval from China Securities Regulatory Commission.

Depreciation and Amortization

The increase in depreciation and amortization in 3Q16 was primarily due to 1) an increase in the capacity of the majority-owned Beijing 12-inch fab, Shanghai 12-inch fab and Shenzhen 8-inch fab and 2) the acquisition of LFoundry in 3Q16.

Liquidity

Note:
(1)    Other financial assets mainly contain financial products sold by bank and bank deposits over 3 months.
(2)    Cash and cash equivalent divided by total current liabilities.
(3)    Current assets excluding inventories divided by total current liabilities
(4)    Total current assets divided by total current liabilities.

Capital Structure

Note:
(1)    Other financial assets mainly contain financial products sold by bank and bank deposits over 3 months.
(2)    Net debt is total debt minus cash and cash equivalent, and other financial assets.
(3)    Total debt divided by equity.
(4)    Net debt divided by equity.

Cash Flow

Capex Summary

• Capital expenditures were $670.9 million in 3Q16, compared to $792.4 million in 2Q16.
• The planned 2016 capital expenditures for foundry operations are approximately $2.6 billion, an increase from $2.5 billion based on the earlier estimate in 2Q16. The increase is mainly for the acquisition of used equipment for Shenzhen new 12-inch fab.
• The planned 2016 capital expenditures for non-foundry operations are approximately $50 million, mainly for the construction of living quarters.

Recent Highlights and Announcements

• SMIC Shenzhen Launches Construction of the First 12-Inch IC Production Line in South China (2016-11-03)
• Delay in Despatch of Circular (2016-11-02)
• Notification of Board Meeting (2016-10-18)
• SMIC Tianjin Launches Capacity Expansion Project; Expected to Become the World's Largest Integrated 8-Inch IC Production Line (2016-10-17)
• SMIC Shanghai Starts Construction of a New 12-Inch Wafer Fab (2016-10-13)
• Continuing Connected Transactions in Relation to Framework Agreement (2016-09-30)
• (1) Proposed Share Consolidation; and (2) Proposed Change in Board Lot Size (2016-09-30)
• Circulars - Notification Letter and Request Form for Non-registered Shareholders (2016-09-20)
• Circulars - Notification Letter for Registered Shareholders (2016-09-20)
• Circulars - Notification Letter and Change Request Form to Registered Shareholders (2016-09-20)
• Circulars - Letter and Reply Form to New Registered Shareholders - Election of Means of Receipt and Language of Corporate Communication (2016-09-20)
• (1) Grant of Share Options and (2) Non-exempt Connected Transactions - Proposed Grant of Restricted Share Units to Directors and Chief Executive Officer (2016-09-12)
• Grant of Options (2016-09-12)
• Announcement of Unaudited Interim Results for the Six Months Ended June 30, 2016 (2016-08-31)
• Notification of Board Meeting (2016-08-19)
• SMIC Reports Unaudited Results for the Three Months Ended June 30, 2016 (2016-08-10)
• Poll Results of Extraordinary General Meeting Held on 10 August 2016 (2016-08-10)
• SJSemi and Qualcomm Jointly Announce Mass Production of 14nm Wafer Bumping Technology (2016-07-28)
• Notification of Board Meeting (2016-07-25)
• Closure of Register of Members (2016-07-25)
• Notice of Extraordinary General Meeting (2016-07-25)
• Circulars - Notification Letter and Request Form for Non-registered Shareholders (2016-07-25)
• Circulars - Notification Letter for Registered Shareholders (2016-07-25)
• Circulars - (1) Major Transaction and Continuing Connected Transactions in Relation to Framework Agreement and (2) Notice of Extraordinary General Meeting(2016-07-25)
• Form of Proxy for Use at the Extraordinary General Meeting to be Held on 10 August 2016 (2016-07-25)
• Shanghai SMIC Private School Receives 6 Year Full Accreditation from The Western Association of Schools and Colleges (WASC) (2016-07-22)
• Continuing Connected Transactions - Supply of Goods and Services, Leasing of Assets, Transfer of Equipment and Provision of Technical Authorisation and Licensing (2016-07-15)
• Overseas Regulatory Announcement (2016-07-12)
• Centralised Fund Management Agreement with Semiconductor Manufacturing North China (Beijing) Corporation (2016-07-08)
• Completion of the Issue of US$450,000,000 Zero Coupon Convertible Bonds Due 2022 (2016-07-08)

Please visit SMIC's website at http://www.smics.com/eng/press/press_releases.php and http://www.smics.com/eng/investors/ir_filings.php for further details regarding the recent announcements.

Note:
(1)   Non-GAAP operating expenses are defined as operating expenses adjusted to exclude the effect of employee bonus accrual, government funding and gain from the disposal of living quarters. SMIC reviews non-GAAP operating expenses together with operating expenses to understand, manage and evaluate its business and make financial and operational decisions. The Group also believes it is useful supplemental information for investors and analysts to assess its operating performance. However, the use of non-GAAP financial measures has material limitations as an analytical tool. One of the limitations of using non-GAAP financial measures is that they do not include all items that impact our net profit for the period. In addition, because non-GAAP financial measures are not calculated in the same manner by all companies, they may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider the non-GAAP operating expenses in isolation from or as an alternative to operating expenses prepared in accordance with IFRS.

The following table sets forth the reconciliation of the non-GAAP operating expenses to its most directly comparable financial measure presented in accordance with IFRS, for the periods indicated.

(2)   EBITDA margin is defined as profit for the period excluding the impact of the finance cost, depreciation and amortization, and income tax expense divided by revenue.  SMIC uses EBITDA margin as a measure of operating performance; for planning purposes, including the preparation of the Group's annual operating budget; to allocate resources to enhance the financial performance of the Group's business; to evaluate the effectiveness of the Group's business strategies; and in communications with SMIC's board of directors concerning the Group's financial performance. Although EBITDA is widely used by investors to measure a company's operating performance without regard to items, such as net finance cost, income tax benefit and expense and depreciation and amortization that can vary substantially from company to company depending upon their respective financing structures and accounting policies, the book values of their assets, their capital structures and the methods by which their assets were acquired, EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of the Group's results of operations as reported under IFRS. Some of these limitations are: it does not reflect the Group's capital expenditures or future requirements for capital expenditures or other contractual commitments; it does not reflect changes in, or cash requirements for, the Group's working capital needs; it does not reflect finance cost; it does not reflect cash requirements for income taxes; that, although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and these measures do not reflect any cash requirements for these replacements; and that other companies in SMIC's industry may calculate these measures differently than SMIC does, limiting their usefulness as comparative measures.

The following table sets forth the reconciliation of EBITDA and EBITDA margin to their most directly comparable financial measures presented in accordance with IFRS, for the periods indicated.

As at the date of this announcement, the directors of the Company are:

Executive Directors
Zhou Zixue (Chairman)
Tzu-Yin Chiu (Chief Executive Officer)
Gao Yonggang (Chief Financial Officer)

Non-executive Directors
Chen Shanzhi (Li Yong Hua as his Alternate)
Zhou Jie
Ren Kai
Lu Jun

Independent Non-executive Directors
William Tudor Brown
Lip-Bu Tan
Carmen I-Hua Chang

By order of the Board
Semiconductor Manufacturing International Corporation
Dr. Tzu-Yin Chiu
Chief Executive Officer
Executive Director

Shanghai, PRC
November 7, 2016

* For identification purposes only