6-K 1 tv517671_6k.htm FORM 6-K

 

  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 6-K

 

 

 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of April, 2019

 

Commission File Number: 001-31994

 

 

 

Semiconductor Manufacturing International Corporation

(Translation of registrant’s name into English)

 

 

 

18 Zhangjiang Road

Pudong New Area, Shanghai 201203

People’s Republic of China

(Address of principal executive office)

 

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

x Form 20-F   o Form 40-F

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

 

o Yes   x No

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): n/a

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Semiconductor Manufacturing International Corporation
     
Date: April 1, 2019 By: /s/ Dr. Gao Yonggang
    Name: Dr. Gao Yonggang
    Title: Executive Director, Chief Financial Officer and Joint Company Secretary

 

 

 

  

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

 

 

SEMICONDUCTOR MANUFACTURING INTERNATIONAL CORPORATION

中 芯 國 際 集 成 電 路 製 造 有 限 公 司 *

(Incorporated in the Cayman Islands with limited liability)

(STOCK CODE: 0981)

 

ANNOUNCEMENT OF 2018 ANNUAL RESULTS

 

 

FINANCIAL HIGHLIGHTS

 

Revenue was US$3,360.0 million in 2018, an increase of 8.3% from US$3,101.2 million in 2017. Excluding the recognition of technology licensing revenue, revenue increased by 3.1% from US$3,101.2 million in 2017 to US$3,196.2 million in 2018.
   
Gross profit was US$746.7 million in 2018, compared to US$740.7 million in 2017. Gross margin was 22.2% in 2018, compared to 23.9% in 2017. Excluding the recognition of technology licensing revenue, gross margin was 18.2% in 2018, compared to 23.9% in 2017.
   
Earnings before interest, tax, depreciation and amortization was a record high of US$1,164.4 million in 2018, compared to US$1,117.7 million in 2017, representing an increase of 4.2%.
   
Revenue from China-region customers grew to 57.0% of total revenue excluding technology licensing in 2018, compared  to  47.3%  in  2017,  representing  a  revenue  growth  of  24.3%.
   
The net debt to equity ratio remained low at –4.5% as of December 31, 2018.

  

  

The board of directors (the “Director(s)“) (the “Board”) of Semiconductor Manufacturing International Corporation (“SMIC” or the “Company”) announces the audited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the year ended December 31, 2018 as follows:

 

 1 

 

  

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This announcement may contain, 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 and Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. These forward- looking statements are based on SMIC’s current assumptions, expectations and projections about future events. SMIC uses words like “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project” and similar expressions to identify forward looking statements, although not all forward-looking statements contain these words. These forward-looking statements are necessarily estimates reflecting judgment of SMIC’s senior management and 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 cyclicality and market conditions in the semiconductor industry, intense competition, timely wafer acceptance by SMIC’s customers, bad debt risk, timely introduction of new technologies, SMIC’s ability to ramp new products into volume, supply and demand for semiconductor foundry services, industry overcapacity, shortages in equipment, components and raw materials, availability of manufacturing capacity and financial stability in end markets.

 

Except as 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 MEASURE

 

This announcement includes EBITDA, which is a non-GAAP financial measure. Such non-GAAP financial measure is 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. The presentation of non-GAAP financial measure is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with IFRS. 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.

 

For more information and reconciliations of the non-GAAP financial measure to its most directly comparable GAAP financial measure, please see the disclosure on page 12.

 

 2 

 

  

LETTER TO SHAREHOLDERS

 

DEAR SHAREHOLDERS,

 

In 2018, the global political and economic environment was complex with many uncertainties. Influenced by the saturation of the smart phone markets and global trade frictions, the growth of the IC industry slowed down and the pressure of price competition increased. The industry is facing great challenges, and yet, with this environment, the Company managed to make remarkable progress, thanks to the dedication and teamwork of all SMIC’s employees. The Company recorded historic high revenue of US$3.36 billion for the year of 2018, representing a year-on-year increase of 8.3%. Earnings before interest, tax, depreciation and amortization amounted to US$1.16 billion, representing a year-on-year increase of 4.2%. For the year of 2018, revenue from PRC-based customers excluding technology licensing revenue increased 24.3% as compared to that of the previous year.

 

2018 was a year of accelerated research and development(“R&D”). We invested over US$0.6 billion in R&D activities, far exceeding the industry average of R&D expenses in terms of revenue. We would like to express our heartfelt gratitude to all the members of our R&D team for their round-the-clock hard-work, enabling us to achieve significant breakthroughs in the research and development of advanced technology, demonstrating noteworthy improvement in the efficiency of our R&D efforts. We have completed the development of 28nm HKC+ and 14nm FinFET technology, and have begun customer engagement. It is expected that the mass production will commence in 2019. We also successfully developed the PRC’s first 14nm masks. With the most advanced mask production capacity in the PRC, we can provide 14nm mask services for our customers this year.

 

2018 was the sixth year in which we have sponsored the “SMIC Liver Transplant Program for Children.” The Company announced in June 2018 that it had donated RMB2.40 million to China Soong Ching Ling Foundation for the project. For the past six years, the Company has donated over RMB13.50 million and our business partners in the industry have donated RMB7.50 million to this program, accumulating a total donation of RMB21 million; through which, 350 afflicted and impoverished children from across the country have successfully received treatment and are able to enjoy their new lives.

 

In 2019, SMIC will operate under the dual pressures of uncertainties surrounding the external environment and the adjustment of the Company in this critical year of transition. We shall continue to focus on advancing our technology, building up platforms and developing business partnerships in order to fulfill our commitments to providing competitive services to our customers. Bearing in mind the saying that good honing gives a sharp edge to a sword and bitter cold adds keen fragrance to plum blossom, we will continue to work together and forge ahead, investing in R&D and providing enhanced customer service to strengthen the Company’s overall competitive edge in order to lead SMIC to become a leading world-class semiconductor foundry in the near future. We remain committed to diligently and carefully execute our business plan for the best interests of all of our shareholders. We would like to again express our sincere gratitude to our shareholders, customers, suppliers, and employees for their continued care and support of SMIC.

 

Zhou  Zixue Zhao Haijun, Liang Mong Song
Chairman of the Board and Executive Director Co-Chief Executive Officers and Executive Directors

 

Shanghai, China
March 29, 2019

 

 3 

 

 

BUSINESS REVIEW

 

In 2018, the Group continued to successfully execute its long-term strategy with sustained profitability and at the same time advancing its technology capabilities on leading edge and value-added differentiated processes. The Group’s technology portfolio and proximity to the China market, coupled with the management team’s proven track record in operations, technology development and customer service, has positioned the Group well for long term growth. 2018 was a milestone year for SMIC in many aspects. It was the second year since the Group appointed Dr. Zhao Haijun and Dr. Liang Mong Song as Co-Chief Executive Officers, during which the Group generated record annual revenue of US$3.36 billion, the highest in the Group’s 18-year history. In 2018, the Group also continued to foster partnerships with leading industry players on 14nm Fin Field Effect Transistor (“FinFET”) process technology development, and is ready for business engagement and IP validation, with expect to risk production expected to commence in 2019. In 2018, there was significant progress on 14nm FinFET process with customers. Our FinFET technology targets to address for mobile, wireless, and computing, AI, IoT and automotive applications to expand our product and service offerings. In addition to 28nm PolySiON and 28nm HKC, our 28nm HKC+ technology development is now completed and will be in mass production in 2019. The Group, together with China Integrated Circuit Industry Investment Fund Co., Ltd (“China IC Fund”) and Shanghai Integrated Circuit Industry Investment Fund Co., Ltd (“Shanghai IC Fund”), built up a majority-owned subsidiary, Semiconductor Manufacturing South China Corporation, to speed up the introduction of advanced FinFET technology and products.

 

We believe the Group was the first pure-play foundry in China to enter into mass production with 28nm wafer process technology for mobile computing applications, the first pure-play foundry worldwide to offer 55nm embedded Flash (“eFlash”) and RF wafer solutions for SIM Card and IoT related wireless connectivity applications, and the first pure-play foundry worldwide to offer 38nm NAND Flash memory wafer process technology. The Group also continued to drive its value-added wafer manufacturing process technologies for specialty products, such as Power Management IC (“PMIC”), Battery Management IC (“BMIC”), embedded Electrically Erasable Programmable Read-Only Memory (“eEEPROM”), eFlash, Microprocessor (“MCU”), Ultra-Low-Power technologies (“ULP”), Radio Frequencies IC (“RF”) and wireless connectivity, Touch Controller IC (“TCIC”), Biometric Sensors, CMOS Image Sensors (“CIS”), and Micro-Electrical-Mechanical System (“MEMS”) sensors. These applications are the essential building blocks for the mobile computing market, the growing automotive electronics market, and Internet-of-Things (“IoT”) market.

 

With an expanded manufacturing base, well-balanced technology portfolio and one-stop shop service offerings, the Group is well positioned with its global operations to serve both domestic and worldwide customers.

 

FINANCIAL OVERVIEW

 

Despite a challenging environment in 2018, the Group’s sales totaled US$3,360.0 million, compared to US$3,101.2 million in 2017. The Group recorded a profit of US$77.2 million in 2018, compared to US$126.4 million in 2017. During the year, we generated US$799.4 million in cash from operating activities, compared to US$1,080.7 million in 2017. Capital expenditures in 2018 totaled US$1,813.4 million, compared to US$2,487.9 million in 2017. Looking ahead, our objective is to continue sustained profitability over the long term. To achieve this, we intend to focus on precision execution, efficiency improvement, customer service excellence while fostering innovation.

 

 4 

 

 

CUSTOMERS AND MARKETS

 

The Group continues to serve a broad global customer base comprising leading integrated device manufacturers, fabless semiconductor companies and system companies. Geographically, customers from the North America contributed 31.6% of the overall revenue in 2018, compared to 40.0% in 2017. Leveraging on the Group’s strategic position in China, our China revenue contributed 59.1% of the overall revenue in 2018, compared to 47.3% in 2017. Eurasia contributed 9.3% of the overall revenue in 2018, compared to 12.7% in 2017.

 

In terms of applications, revenue contribution from communication applications represented 41.2% to the Group’s overall revenue in 2018 as compared to 44.3% in 2017. Consumer applications contributed 34.4% to the Group’s overall revenue in 2018 as compared to 37.4% in 2017. While the Group has very limited exposure to the PC market, it has grown its business in computer applications from US$192.3 million in 2017 to US$221.0 million in 2018, representing a 14.9% increase on annual growth in the computer segment. The Group has also increased its revenue in automotive and industrial applications from US$244.8 million in 2017 to US$263.0 million in 2018, representing a 7.4% increase on annual growth. Furthermore, other related applications revenue increase from US$132.5 million in 2017 to US$171.7 million (excluding the recognized technology licensing revenue of US$163.8 million authorized to an associate of Group) in 2018, representing a 29.6% increase on annual growth.

 

In terms of the revenue by technology, wafer revenue attributable to advanced technology at 90nm and below represented 49.9% in 2018 as compare to 50.7% in 2017, in particular, the revenue contribution percentage from 65/55nm technology increased from 20.4% in 2017 to 22.3% in 2018. In addition, the Group continued to have steady revenue growth from 90nm and 0.15/0.18µm related business in 2018.

 

We believe the Group is also well positioned with its continuous business growth in China. According to IHS Markit, China continues to be the number one region of the world in terms of semiconductor IC consumptions, mainly due to its high volume electronics manufacturing and mass consumer market. IHS estimates that US$240 billion worth of semiconductors were shipped to China in 2018, representing 48.6% of worldwide semiconductor value. In addition, we believe the overall local China’s IC design market is still growing healthily and strongly. Local analyst, IHS Markit, estimated that the China’s IC design market reached approximately US$33 billion in 2018, a 26.9% year to year increase from 2017 and projected that it might experience a compound annual growth rate of 20.0% till year 2022, which would bring the worth of the China IC design market to US$82 billion by 2022. Global pure-play foundry market revenue year-on-year growth rate was 4.55% in 2018 according to IHS Markit, relatively SMIC total revenue year-on-year growth rate was 8.3% in 2018. While global pure-play foundry market is expected to grow by a compound annual growth rate of 4.62% during 2018 to 2022, our business revenue growth target is in line with foundry industry growth rate.

 

Notably, as indicative of future revenue growth, we continued to see new designs using both specialty technology and advanced technology, in particular on 0.18µm, 0.11/0.13µm, 55/65nm, 40/45nm, 28nm and 14nm FinFET process technologies. The Group has, in each of its sales regions, customers utilizing its most competitive specialty technology and advanced node technology. We believe China is rapidly closing the gap with the rest of the world in terms of innovation and design capabilities. To fully leverage the market growth potential in China, the Group plans to continue to deepen its collaboration with Chinese customers while broadening relationships with its global customers and enable their success in China and various emerging markets, such as mobile computing, automotive electronics, IoT, high performance computing, 5G, industrial, security and surveillance, Artificial Intelligence (“AI”), and edge computing related applications.

 

 5 

 

 

LONG-TERM BUSINESS MODEL AND STRATEGY FOR GENERATING AND PRESERVING VALUE

 

SMIC’s long-term goal is to focus on generating value for the benefit of all stakeholders. SMIC’s long-term business model is to function as the foundry service provider of choice in mainland China, while targeting to be a world- class service provider. SMIC’s strategy to generate sustainable growth and long-term profitability is three-fold. First, SMIC aims to accelerate advanced technology development, and expanding product portfolios with various applications, in order to capture the market opportunities. Second, we are dedicated to offer our customers a total solution with a full product portfolio including masks, IP manufacturing, testing and packaging, to enable long-term commitment and customer relations. Third, we aim to capture the advanced technology node and increased semiconductor market share, through strategic partnerships with key customers. We continue to evaluate the potential long-term value-addition of opportunities in our decision-making processes, and our management team is committed to building value in the long-term for the benefit of our employees and shareholders.

 

RESEARCH AND DEVELOPMENT

 

SMIC primarily focuses its research and development (“R&D”) efforts on advanced logic and value-added specialty technologies. SMIC aims to accelerate advanced technology development with an emphasis on FinFET technology.

 

In 2018, SMIC successfully established its 14 nanometer technology platform, received customer recognition and moved into customer engagement and development verification. Our 14 nanometer technology will enter production in 2019. Meanwhile, 12 nanometer technology development also achieved breakthrough.

 

In 2018, SMIC launched the second generation 28HKMG platform, 28HKC+, for both Base Band and RF applications, with 15% performance improvement and 25% power reduction as compared with first generation 28HKMG technology 28HKC. Our 28HKC+ will enter production in 2019.

 

SMIC has also worked to enhance its R&D organizational structure in 2018, resulting in expanded capability, high efficiency, and increased resource allocation for accelerating technology developments, including advanced and specialty technologies.

 

In 2018, SMIC made over 600 patent filings as a result of its technology R&D activities.

 

OUTLOOK FOR 2019

 

Looking forward, we believe that 2019 is a year of uncertainty, and also a year of opportunity for SMIC. With uncertainties in the macro environment, we are actively seeking growth opportunities through steady progress in expanding our customer base, enriching mature and specialty technology product mix and applications, and exploring value-added opportunities. We continue to strive to be fundamentally strong, as we tighten customer partnerships and further expand our technology development.

 

For the year of 2019, we target core business revenue to be in line with the foundry industry revenue growth forecast. We continue to target a balanced strategy to maintain growth and profitability.

 

In 2019, our planned capital expenditure is $2.2 billion, which will be mainly used to build up the new majority-owned subsidiary’s advanced fab in Shanghai, targeting to have a mini-line ready in the second half of the year. As we expand capacity to support the needs of our customers, we continue to utilize a joint-venture model for our advanced node facilities.

 

We continue to refine and build up our various mature node platforms. Mature technology is still a key growth driver for SMIC, as we plan to have multiple products ramping this year, including power management, memory, high-voltage LCD driver, CMOS image sensors, and fingerprint sensors.

 

In 2019, we are conservatively optimistic, as we see an abundance of opportunities knocking at our door. We expect China business to continue to be strong and maintain our commitment to serving a diverse range of global customers. SMIC’s aim is to be a fundamentally strong company, and in the near to mid-term we must withstand the growing pains of developing and laying a strong foundation for our strategies and business.

 

 6 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

 

CONSOLIDATED FINANCIAL DATA

 

The summary consolidated financial data presented below as of and for the years ended December 31, 2014, 2015, 2016, 2017 and 2018 are derived from, and should be read in conjunction with, the audited consolidated financial statements, including the related notes, found elsewhere in this announcement. The summary consolidated financial data presented below have been prepared in accordance with IFRS.

 

PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME DATA

 

   For the year ended December 31, 
   2018   2017   2016   2015   2014 
   (in US$ thousands, except per share, shares, percentages and units) 
Revenue   3,359,984    3,101,175    2,914,180    2,236,415    1,969,966 
Cost of sales   (2,613,307)   (2,360,431)   (2,064,499)   (1,553,795)   (1,486,514)
Gross profit   746,677    740,744    849,681    682,620    483,452 
Research and development expenses, net   (558,110)   (427,111)   (318,247)   (237,157)   (189,733)
Sales and marketing expenses   (30,455)   (35,796)   (35,034)   (41,876)   (38,252)
General and administration expenses   (199,818)   (198,036)   (167,582)   (213,190)   (137,871)
Net impairment losses (recognized) reversal on financial assets   (937)   137    10,211    13    (1,557)
Other operating income, net   57,283    44,957    177    31,594    14,206 
Profit from operations   14,640    124,895    339,206    222,004    130,245 
Interest  income   64,339    27,090    11,243    5,199    14,230 
Finance  costs   (24,278)   (18,021)   (23,037)   (12,218)   (20,715)
Foreign  exchange  losses   (8,499)   (12,694)   (1,640)   (26,349)   (5,993)
Other gains (losses), net   24,282    16,499    (2,113)   55,611    18,210 
Share of gain (loss) of investment accounted for using equity method   21,203    (9,500)   (13,777)   (13,383)   2,073 
Profit  before  tax   91,687    128,269    309,882    230,864    138,050 
Income tax (expense) benefit   (14,476)   (1,846)   6,552    (8,541)   (11,789)
Profit for the year   77,211    126,423    316,434    222,323    126,261 
Other  comprehensive  income  (loss)                         
Item that may be reclassified subsequently to profit or loss                         
Exchange  differences  on  translating  foreign operations   (35,919)   23,213    (19,031)   (8,185)   (324)
Change in value of available-for-sale financial assets       (2,381)   807    452     
Cash flow hedges   35,931    35,143    (34,627)        
Share  of  other  comprehensive  income  of  joint ventures  accounted  for  using  equity  method       17,646             
Others       (131)   1    130     
Items that will not be reclassified to profit or loss                         
Actuarial gains or losses on defined benefit plans   129    (436)   1,520         
Total comprehensive income for the year   77,352    199,477    265,104    214,720    125,937 

 

 7 

 

  

       For the year ended December 31,     
   2018   2017   2016   2015   2014 
   (in US$ thousands, except per share, shares, percentages and units) 
Profit (loss) for the year attributable to:                         
Owners of the Company   134,055    179,679    376,630    253,411    152,969 
Non-controlling interest   (56,844)   (53,256)   (60,196)   (31,088)   (26,708)
    77,211    126,423    316,434    222,323    126,261 
Total comprehensive income (loss) for the year attributable to:                         
Owners of the Company   133,977    251,135    326,191    245,803    152,645 
Non-controlling interest   (56,625)   (51,658)   (61,087)   (31,083)   (26,708)
    77,352    199,477    265,104    214,720    125,937 
Earnings per share(1)                         
Basic  $0.03   $0.04   $0.09   $0.07   $0.05 
Diluted  $0.03   $0.04   $0.08   $0.06   $0.04 
Shares issued and outstanding(1)   5,039,819,199    4,916,106,889    4,252,922,259    4,207,374,896    3,585,609,617 
Financial Ratio                         
Gross margin   22.2%   23.9%   29.2%   30.5%   24.5%
Net margin   2.3%   4.1%   10.9%   9.9%   6.4%
Operating Data                         
Wafers shipped (in unit)   4,874,663    4,310,779    3,957,685    3,015,966    2,559,245 

 

MAIN FINANCIAL POSITION DATA

 

       As of December 31,     
   2018   2017   2016   2015   2014 
   (in US$ thousands) 
Total assets   14,424,320    11,918,451    10,115,278    7,115,347    5,769,379 
Total non-current assets   8,274,729    7,749,467    6,431,525    4,525,297    3,471,120 
Property, plant and equipment   6,777,970    6,523,403    5,687,357    3,903,818    2,995,086 
Investments in associates   1,135,442    758,241    240,136    181,331    57,631 
Total current assets   6,149,591    4,168,984    3,683,753    2,590,050    2,298,259 
Inventories   593,009    622,679    464,216    387,326    316,041 
Trade and other receivables   837,828    616,308    645,822    499,846    456,388 
Financial assets at amortized cost(2)   1,996,808                 
Other financial assets(2)       683,812    31,543    282,880    644,071 
Restricted cash — current   592,290    336,043    337,699    302,416    238,051 
Cash and cash equivalent   1,786,420    1,838,300    2,126,011    1,005,201    603,036 
Total liabilities   5,500,740    5,197,116    4,712,051    2,925,092    2,461,657 
Total  non-current liabilities   2,641,512    3,290,337    2,731,151    1,157,901    1,311,416 
Total current liabilities   2,859,228    1,906,779    1,980,900    1,767,191    1,150,241 
Total equity   8,923,580    6,721,335    5,403,227    4,190,255    3,307,722 
Non-controlling interests   2,905,766    1,488,302    1,252,553    460,399    359,307 

 

(1)The basic and diluted earnings per share and the number of shares for 2014, 2015 and 2016 have been adjusted to reflect the impact of the Share Consolidation, on the basis that every ten ordinary shares of US$0.0004 each consolidated into one ordinary share of US$0.004 each, which was accounted for as a reverse stock split effective on December 7, 2016.

 

(2)Other financial assets were mainly reclassified to financial assets at amortized cost as of January 1, 2018, compliment with IFRS 9. For details, please refer to Note 2 to the Consolidated Financial Statements.

 

 8 

 

  

MAIN CASH FLOW DATA                    
       For the year ended December 31,     
   2018   2017   2016   2015   2014 
   (in US$ thousands) 
Net cash generated from operating activities   799,426    1,080,686    977,202    669,197    608,102 
Profit for the year   77,211    126,423    316,434    222,323    126,261 
Depreciation and amortization   1,048,410    971,382    729,866    523,549    549,468 
Net cash used in investing activities   (3,197,261)   (2,662,139)   (2,443,333)   (789,556)   (1,144,123)
Payments for property, plant and equipment   (1,808,253)   (2,287,205)   (2,757,202)   (1,230,812)   (653,134)
Net cash from financing activities   2,376,922    1,271,591    2,614,778    537,078    676,683 
Net (decrease) increase in cash and cash equivalent   (20,913)   (309,862)   1,148,647    416,719    140,662 

 

YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017

 

REVENUE

Revenue increased by 8.3% from US$3,101.2 million for 2017 to US$3,360.0 million for 2018. Excluding the recognition of technology licensing revenue, revenue increased by 3.1% from US$3,101.2 million for 2017 to US$3,196.2 million for 2018, primarily due to the net impact of an increase in wafer shipments and decrease in average selling price in 2018. The number of wafer shipments increased by 13.1% from 4,310,779 8-inch wafer equivalents for 2017 to 4,874,663 8-inch wafer equivalents for 2018. The average selling price* of the wafers the Group shipped decreased from US$719 per wafer in 2017 to US$656 in 2018. The technology licensing revenue of US$163.8 million internally developed and not capitalized was authorized to Semiconductor Manufacturing Electronics (Shaoxing) Corporation (an associate of the Group) with no related cost of sales recognized by the Group.

 

COST OF SALES

Cost of sales increased by 10.7% from US$2,360.4 million for 2017 to US$2,613.3 million for 2018, primarily due to the increase in depreciation and in wafer shipment and product-mix change in 2018. Out of the total cost of sales, US$774.3 million and US$831.4 million were attributable to depreciation and amortization for the year ended December 31, 2017 and 2018, respectively.

 

GROSS PROFIT

The Group’s gross profit was US$746.7 million for 2018 compared to US$740.7 million for 2017. Gross margin was 22.2% in 2018 compared to 23.9% in 2017. Excluding the recognition of technology licensing revenue, gross margin decreased to 18.2% in 2018 from 23.9% in 2017, primarily due to product-mix change and lower average selling price in 2018.

 

PROFIT FOR THE YEAR FROM OPERATIONS

Profit from operations decreased from US$124.9 million for the year ended December 31, 2017 to US$14.6 million for the year ended December 31, 2018 primarily due to the combined effect of the changes of revenue, cost of sales and gross profit mentioned above, and the below following changes:

 

Research and development expenses increased by 30.7% from US$427.1 million for the year ended December 31, 2017 to US$558.1 million for the year ended December 31, 2018. The increase was mainly due to the higher level of R&D activities in 2018.

 

General and administrative expenses increased from US$198.0 million for the year ended December 31, 2017 to US$199.8 million for the year ended December 31, 2018.

 

* Based on simplified average selling price which is calculated as the revenue (excluding technology licensing revenue) divided by total shipments.

 

 9 

 

 

Sales and marketing expenses decreased from US$35.8 million for the year ended December 31, 2017 to US$30.5 million for the year ended December 31, 2018.

 

Other operating incomes increased from US$45.0 million for the year ended December 31, 2017 to US$57.3 million for the year ended December 31, 2018. The increase was mainly due to increased gain on disposal of property, plant and equipment in 2018.

 

PROFIT FOR THE YEAR

 

The Group had a profit of US$77.2 million for 2018 compared to US$126.4 million for 2017 mainly due to the net impact of 1) the factors described above, 2) more interest net income, 3) decreased foreign exchange losses, and 4) more gains on investment in financial instruments and entities accounted for using equity method.

 

FUNDING SOURCES FOR MATERIAL CAPITAL EXPENDITURE IN THE COMING YEAR

 

The Group’s planned 2019 capital expenditures for foundry operations are approximately $2.1 billion, which are mainly for the expansion of capacity in our majority-owned Shanghai 300mm fab and our FinFET R&D line.

 

The Group’s planned 2019 capital expenditures for non-foundry operations are approximately $105.8 million, mainly for the construction of employees’ living quarters.

 

The Group’s actual expenditures may differ from its planned expenditures for a variety of reasons, including changes in its business plan, market conditions, equipment prices, or customer requirements. The Group will monitor the global economy, the semiconductor industry, the demands of its customers, and its cash flow from operations and will adjust its capital expenditures plans as necessary.

 

The primary sources of capital resources and liquidity include cash generated from operations, bank borrowings and debt or equity issuances, capital injections from non-controlling interests and other forms of financing. Future acquisitions, mergers, strategic investments, or other developments also may require additional financing. The amount of capital required to meet the Group’s growth and development targets is difficult to predict in the highly cyclical and rapidly changing semiconductor industry.

 

DEBT ARRANGEMENTS

 

Set forth in the table below are the aggregate amounts, as of December 31, 2018, of the Group’s future cash payment obligations under the Group’s existing contractual arrangements on a consolidated basis:

 

       Payments due by period Less than     
Contractual obligations  Total   1 year   1–2 years   2–5 years   Over 5 
   years (consolidated, in US$ thousands) 
Short-term borrowings   192,198    192,198             
Long-term borrowings   2,098,570    337,807    434,998    895,135    430,630 
Convertible  bonds   418,592            418,592     
Bonds payable   498,551    498,551             
Medium-term notes   218,247    218,247             
Purchase commitments   1,548,278    1,548,278             
Lease commitments   352,540    121,588    230,952         
Total  contractual  obligations   5,326,976    2,916,669    665,950    1,313,727    430,630 

 

As of December 31, 2018, the Group’s outstanding long-term loans primarily consisted of secured bank loans of US$524.1 million and unsecured bank loans of US$1,574.5 million which are repayable in installments starting in January 2019, with the last payment due in May 2031. A summary of borrowing arrangements is disclosed in Note 30 to our financial statements for reference.

 

 10 

 

  

ASSETS PLEDGED AS SECURITY

 

Property, plant and equipment with carrying amount of approximately US$207.2 million have been pledged to secure borrowings of the Group under mortgages. The Group is not allowed to pledge these assets as security for other borrowings or to sell them to other entities.

 

COMMITMENTS

 

As of December 31, 2018, the Group had commitments of US$1,548.3 million, of which US$333.2 million for facilities construction obligations in connection with the Group’s facilities, US$1,209.3 million to purchase machinery and equipment for its fabs and US$5.7 million to purchase intellectual property.

 

As of December 31, 2018, the Group had total future minimum lease payments under non-cancellable operating leases amounted to US$352.5 million. For the details, please refer to Note 41 to our consolidated financial statements of this announcement.

 

GEARING RATIO

 

As of December 31, 2018, the Group’s net debt to equity ratio was approximately –4.5%. Please refer to Note 38 to our financial statements for calculation.

 

CAPITALIZED INTEREST

 

Interest, after netting off government funding received, incurred on borrowed funds used to construct plant and equipment during the active construction period is capitalized. The interest capitalized is determined by applying the borrowing interest rate to the average amount of accumulated capital expenditures for the assets under construction during the period. Capitalized interest is added to the cost of the underlying assets and is depreciated over the useful life of the assets. Capitalized interests of US$47.2 million and US$31.1 million in 2018 and 2017, respectively, were added to the cost of the underlying assets and are depreciated over the respective useful life of the assets. In 2018 and 2017, the Group recorded depreciation expenses relating to the capitalized interest of US$27.5 million and US$22.7 million, respectively.

 

EXCHANGE RATE AND INTEREST RATE RISKS

 

The Group’s revenue, expense, and capital expenditures are primarily transacted in U.S. dollars. The Group also enters into transactions in other currencies that results the Group primarily exposed to changes in exchange rates for the Euro, Japanese Yen, and RMB. Additionally, the Group entered into or issued several RMB denominated loan facility agreements, short-term notes and medium-term notes and several RMB denominated financial assets at amortized cost that results the Group exposed to changes in the exchange rate for the RMB. Foreign-currency forward exchange contracts and cross currency swap contracts is used to minimize these risks.

 

The Group’s exposure to interest rate risks relates primarily to the Group’s long-term loans, which the Group generally assumes to fund capital expenditures and working capital requirements. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings, and by the use of interest rate swap contracts and cross currency swap contracts.

 

Details of the Group’s foreign exchange risk and interest rate risk are set out in Note 38 to our consolidated financial statements of this announcement for reference.

 

 11 

 

 

EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION (“EBITDA”)

 

EBITDA is defined as profit for the period excluding the impact of the finance cost, depreciation and amortization, and income tax benefit and expense. SMIC uses EBITDA 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 to their most directly comparable financial measures presented in accordance with IFRS, for the periods indicated.

 

   Year ended
12/31/18
USD’000
   Year ended
12/31/17
USD’000
   Year ended
12/31/16
USD’000
 
Profit for the year   77,211    126,423    316,434 
Finance costs   24,278    18,021    23,037 
Depreciation  and  amortization   1,048,410    971,382    729,866 
Income tax expense (benefit)   14,476    1,846    (6,552)
EBITDA   1,164,375    1,117,672    1,062,785 

 

MATERIAL INVESTMENTS, ACQUISITIONS AND DISPOSALS

 

CAPITAL CONTRIBUTION IN SEMICONDUCTOR MANUFACTURING SOUTH CHINA CORPORATION (“SMSC”)

On January 30, 2018, SMIC Holdings Corporation (“SMIC Holdings”), Semiconductor Manufacturing International (Shanghai) Corporation (“SMIC Shanghai”), China IC Fund and Shanghai IC Fund entered into the joint venture agreement and the capital contribution agreement pursuant to which SMIC Holdings, China IC Fund and Shanghai IC Fund agreed to make cash contribution to the registered capital of SMSC in the amount of US$1.5435 billion, US$946.5 million and US$800.0 million, respectively. As a result of the capital contribution: (i) the registered capital of SMSC will increase from US$210.0 million to US$3.5 billion; (ii) the Company’s equity interest in SMSC, through SMIC Holdings and SMIC Shanghai, will decrease from 100% to 50.1%; and (iii) SMSC will be owned as to 27.04% and 22.86% by China IC Fund and Shanghai IC Fund, respectively.

 

The principal business of SMSC includes wafer manufacturing, wafer probing and bumping, technology development, design service, mask manufacturing, assembly and final testing of integrated circuits and sales of self- manufactured products. SMSC is expected to establish and build up large-scale manufacturing capacity focusing on 14 nanometer and below process and manufacturing technologies and aims to reach a manufacturing capacity of 35,000 wafers per month. The Group believes that the investment in SMSC is attractive and able to generate sustainable and attractive returns in the near future.

 

 12 

 

 

EQUITY TRANSFER AND CAPITAL CONTRIBUTION IN NINGBO SEMICONDUCTOR INTERNATIONAL CORPORATION (“NSI”)

On March 22, 2018, NSI, SMIC Holdings and China IC Fund entered into the equity transfer agreement, pursuant to which SMIC Holdings has agreed to sell the equity Interest to China IC Fund. Upon the completion of the equity transfer, the shareholding of SMIC Holdings in NSI will decrease from approximately 66.76% to 38.59%, and NSI will cease to be a subsidiary of the Company and its financial results will cease to be consolidated with the Group’s results. The equity transfer has been completed in April, 2018 and the Group recorded its ownership interest of NSI as investment in associate.

 

On March 23, 2018, NSI, SMIC Holdings, China IC Fund, Ningbo Senson Electronics Technology Co., Ltd, Beijing Integrated Circuit Design and Testing Fund, Ningbo Integrated Circuit Industry Fund and Infotech National Emerging Fund entered into the capital increase agreement, pursuant to which (i) SMIC Holdings has agreed to make further cash contribution of RMB565.0 million (approximately US$89.4 million) into the registered capital of NSI. Its shareholding in NSI will decrease from approximately 38.59% to approximately 38.57%; (ii) China IC Fund has agreed to make further cash contribution of RMB500.0 million (approximately US$79.2 million) into the registered capital of NSI. Its shareholding in NSI will increase from approximately 28.17% to approximately 32.97%. The all above parties’ performance of the Capital Contribution obligations will lead to an increase in the registered capital from RMB355 million to RMB1.82 billion (approximately US$56.2 million to US$288.1 million).

 

CAPITAL CONTRIBUTION IN IPV CAPITAL GLOBAL TECHNOLOGY FUND (THE “IPV FUND”)

On May 2, 2018, IPV Global Technology Management Limited as the general partner and China IC Fund, China IC Capital Co., Ltd (“China IC Capital”, a wholly-owned investment fund company of SMIC) and other investor as the limited partners entered into the partnership agreement in relation to the establishment and management of the IPV Fund. The IPV Fund will be established in the PRC as a limited partnership for the purpose of equity investments, investment management and other activities, in order to maximize the profit of all partners. Pursuant to the partnership agreement, the total capital commitment to the IPV Fund is RMB1,616.2 million (approximately US$244.3 million) of which RMB800.0 million (approximately US$120.9 million) is to be contributed by China IC Fund and RMB165.0 million (approximately US$24.9 million) is to be contributed by China IC Capital. As of the date of this announcement, China IC Capital has contributed to RMB49.5 million (approximately US$7.5 million).

 

SUBSCRIPTION OF SHARES IN JIANGSU CHANGJIANG ELECTRONICS TECHNOLOGY CO. LTD (“JCET”)

On August 30, 2018, the Company has, through its wholly-owned subsidiary Siltech Semiconductor (Shanghai) Corporation Limited, completed a subscription for 34,696,198 shares in JCET in cash by way of private placement (the “Subscription”). The shares were subscribed at a price of RMB14.89 per share, with the total subscription price being RMB516,626,388.22 (approximately US$75.9 million). Immediately before and after completion of the Subscription, the shareholding interest of the Company in JCET is 14.28%. The Company understands that JCET has completed the issue and registration procedures of these shares, including listing of the shares on the Shanghai Stock Exchange. The newly subscribed shares will not be transferrable by the Company for 36 months after completion of the Subscription.

 

SHARE CAPITAL

 

Movements in the share capital of the Company during the year are set out in the below section Issue of Equity Securities and Note 26 to the consolidated financial statement.

 

DISTRIBUTABLE RESERVE

 

The Company’s reserves available for distribution to shareholders as of December 31, 2018 amounted to US$191.4 million (December 31, 2017: US$96.4 million and December 31, 2016: nil).

 

 13 

 

 

ISSUE OF EQUITY SECURITIES

 

ISSUE OF NEW SHARES TO DATANG TELECOM TECHNOLOGY & INDUSTRY HOLDINGS CO., LTD. (“DATANG”)

On June 29, 2018, pursuant to the share subscription agreement between the Company, Datang and Datang Holdings (Hongkong) Investment Company Limited (“Datang HK”), the Company allotted and issued 61,526,473 ordinary shares, representing an aggregate nominal value of approximately US$246,106, at the price of HK$10.65 per share. The net price per share under the issue is HK$10.65. The market price of the shares on the date of the share subscription agreement was HK$10.34.

 

ISSUE OF PERPETUAL SUBORDINATED CONVERTIBLE SECURITIES (THE “PSCS”) TO DATANG

On June 29, 2018, pursuant to the PSCS subscription agreement between the Company, Datang and Datang HK, the Company completed the issue of the PSCS in the principal amount of US$200.0 million. Assuming full conversion of the PSCS at the initial conversion price of HK$12.78, the PSCS will be convertible into 122,118,935 ordinary shares, representing an aggregate nominal value of approximately US$488,476. The net price per conversion share under the issue is HK$12.77. The market price of the shares on the date of the PSCS subscription agreement was HK$10.34.

 

ISSUE OF NEW SHARES TO CHINA IC FUND

On August 29, 2018, pursuant to the share subscription agreement between the Company, China IC Fund and Xinxin (Hongkong) Capital Co., Ltd (“Xinxin HK”, wholly-owned by China IC Fund), the Company allotted and issued 57,054,901 ordinary shares, representing an aggregate nominal value of approximately US$228,220, at the price of HK$10.65 per share. The net price per share under the issue is HK$10.65. The market price of the shares on the date of the share subscription agreement was HK$9.11.

 

ISSUE OF THE PSCS TO CHINA IC FUND

On August 29, 2018, pursuant to the PSCS subscription agreement between the Company, China IC Fund and Xinxin HK, the Company completed the issue of the PSCS in the principal amount of US$300.0 million. Assuming full conversion of the PSCS at the initial conversion price of HK$12.78, the PSCS will be convertible into 183,178,403 ordinary shares, representing an aggregate nominal value of approximately US$732,714. The net price per conversion share under the issue is HK$12.77. The market price of the shares on the date of the PSCS subscription agreement was HK$9.11.

 

REPURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

 

SHARE BUY-BACK

On September 27, 2018, the company repurchased 7,291,000 ordinary shares on Hong Kong Stock Exchange. The buy-back was approved by shareholders at the annual general meeting on June 22, 2018. The ordinary shares were acquired at an average price of HK$8.32 per share, with prices ranging from HK$8.27 to HK$8.36. The total cost of HK$60.8 million (approximately US$7.8 million) was deducted from the shareholder equity.

 

On October 4, 2018, the company repurchased 11,650,000 ordinary shares on Hong Kong Stock Exchange. The buy- back was approved by shareholders at the annual general meeting on June 22, 2018. The ordinary shares were acquired at an average price of HK$8.23 per share, with prices ranging from HK$8.11 to HK$8.32. The total cost of HK$96.1 million (approximately US$12.3 million) was deducted from the shareholder equity. On October 25, 2018, the company cancelled 18,941,000 ordinary shares amounted at US$20.0 million, in respect of the repurchase on September 27, 2018 and October 4, 2018.

 

For details, please refer to Note 26 to the Consolidated Financial Statements.

 

 14 

 

 

CONVERSION OF ZERO COUPON CONVERTIBLE BOND

The Company exercised its right to redeem the US$200.0 million zero coupon convertible bonds due 2018, the US$86.8 million zero coupon convertible bonds due 2018, the US$95.0 million zero coupon convertible bonds due 2018 and the US$22.2 million zero coupon convertible bonds due 2018 (the “Bonds”) on March 10, 2017 being the option redemption date when all of the Bonds would be redeemed in cash at 100% of the Bonds’ principal amount. The conversion price is HK$7.965, approximately US$1.027. On March 3, 2017, the Company received notices from all holders of the Bonds for the full conversion of the outstanding Bonds. As all outstanding Bonds have been fully converted and no Bonds remain outstanding, no redemption of the Bonds will be carried out. The Company delisted the Bonds from the Singapore Exchange Securities Trading Limited. For details, please refer to Note 31 to the Consolidated Financial Statements.

 

CORPORATE GOVERNANCE PRACTICES

 

The HKSE’s Corporate Governance Code (the “CG Code”) as set out in Appendix 14 to the Hong Kong Stock Exchange Listing Rules contains code provisions (the “Code Provisions”) to which an issuer, such as the Company, is expected to comply or advise as to reasons for deviations and recommends best practices which an issuer is encouraged to implement (the “Recommended Practices”). The Company has adopted a set of Corporate Governance Policy (the “CG Policy”) since January 25, 2005 as its own code of corporate governance, which was amended from time to time to comply with the CG Code. The CG Policy, a copy of which can be obtained on the Company’s website at www.smics.com under “Investor Relations > Corporate Governance > Policy and Procedures”, incorporates all of the Code Provisions of the CG Code except for Code Provision E.1.3, which relates to the notice period of general meetings of the Company, and many of the Recommended Practices. In addition, the Company has adopted or put in place various policies, procedures, and practices in compliance with the provisions of the CG Policy.

 

During the year ended December 31, 2018, the Company was in compliance with all the Code Provisions set out in the CG Code except as explained below:

 

Code Provision A.4.2 of the CG Code requires that all directors appointed to fill a casual vacancy should be subject to election by shareholders at the first general meeting after appointment. According to Article 126 of the Articles of Association of the Company, any Director appointed by the Board to fill a casual vacancy or as an addition to the existing Directors shall hold office only until the next following annual general meeting of the Company after appointment and shall then be eligible for re-election at that meeting.

 

Save as the aforesaid and in the opinion of the Directors, the Company had complied with all Code Provisions set out in the CG Code during the year ended December 31, 2018.

 

MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF LISTED ISSUERS

 

The Company has adopted an Insider Trading Compliance Program (the “Insider Trading Policy”) which encompasses the requirements of the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Hong Kong Stock Exchange Listing Rules (the “Model Code”). The Company, having made specific enquiry of all Directors, confirms that all Directors have complied with the Insider Trading Policy and the Model Code throughout the year ended December 31, 2018. The senior management of the Company as well as all officers, Directors, and employees of the Company and its subsidiaries are also required to comply with the provisions of the Insider Trading Policy.

 

REVIEW BY AUDIT COMMITTEE

 

The Audit Committee of the Company has reviewed with the management of the Company, the accounting principles and practices accepted by the Company and has discussed with the Directors matters concerning internal controls and financial reporting of the Company, including a review of the audited financial statements of the Group for the year ended December 31, 2018.

 

 15 

 

 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the year ended December 31, 2018, 2017 and 2016

 

(In USD’000, except share and per share data)

 

   Notes   Year ended
12/31/18
   Year ended
12/31/17
   Year ended
12/31/16
 
Revenue   5    3,359,984    3,101,175    2,914,180 
Cost of sales        (2,613,307)   (2,360,431)   (2,064,499)
Gross profit        746,677    740,744    849,681 
Research and development expenses, net        (558,110)   (427,111)   (318,247)
Sales  and  marketing  expenses        (30,455)   (35,796)   (35,034)
General and administration expenses        (199,818)   (198,036)   (167,582)
Net impairment losses (recognized) reversal on financial assets   38    (937)   137    10,211 
Other operating income, net   7    57,283    44,957    177 
Profit from operations        14,640    124,895    339,206 
Interest income        64,339    27,090    11,243 
Finance costs   8    (24,278)   (18,021)   (23,037)
Foreign  exchange  losses        (8,499)   (12,694)   (1,640)
Other gains (losses), net   9    24,282    16,499    (2,113)
Share of gain (loss) of investment accounted for using equity method        21,203    (9,500)   (13,777)
Profit  before  tax        91,687    128,269    309,882 
Income  tax  (expense)  benefit   10    (14,476)   (1,846)   6,552 
Profit for the year   11    77,211    126,423    316,434 
Other  comprehensive  income  (loss)                    
Items that may be reclassified subsequently to profit or loss                    
Exchange differences on translating foreign operations        (35,919)   23,213    (19,031)
Change in value of available-for-sale financial assets            (2,381)   807 
Cash flow hedges   27    35,931    35,143    (34,627)
Share of other comprehensive income of investment accounted  for  using  the  equity  method   27        17,646     
Others            (131)   1 
Items that will not be reclassified to profit or loss                    
Actuarial gains or losses on defined benefit plans   27    129    (436)   1,520 
Total comprehensive income for the year        77,352    199,477    265,104 
Profit (loss) for the year attributable to:                    
Owners  of  the  Company        134,055    179,679    376,630 
Non-controlling  interests        (56,844)   (53,256)   (60,196)
         77,211    126,423    316,434 
                    
Total comprehensive income (loss) for the year attributable to:                    
Owners  of  the  Company        133,977    251,135    326,191 
Non-controlling  interests        (56,625)   (51,658)   (61,087)
         77,352    199,477    265,104 
Earnings  per  share*                    
Basic   14   $0.03   $0.04   $0.09 
Diluted   14   $0.03   $0.04   $0.08 

 

*The basic and diluted earnings per share for 2016 have been adjusted to reflect the impact of the Share Consolidation, on the basis that every ten ordinary shares of US$0.0004 each consolidated into one ordinary share of US$0.004 each, which was accounted for as a reverse stock split effective on December 7, 2016 (“Share Consolidation”). Please refer to Note 14 for more details.

 

 16 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As of December 31, 2018, 2017 and 2016

 

(In USD’000)

 

   Notes   12/31/18   12/31/17   12/31/16 
                 
Assets                    
Non-current assets                    
Property, plant and equipment   16    6,777,970    6,523,403    5,687,357 
Land use right        105,436    97,477    99,267 
Intangible assets   17    122,854    219,944    248,581 
Investments in associates   19    1,135,442    758,241    240,136 
Investments in joint ventures   20    15,687    31,681    14,359 
Deferred tax assets   10    45,426    44,875    45,981 
Financial assets at fair value through profit or loss   21    55,472         
Derivative financial instruments   21    5,266        32,894 
Other financial assets   21        17,598     
Restricted cash   22        13,438    20,080 
Other assets   21    11,176    42,810    42,870 
Total non-current assets        8,274,729    7,749,467    6,431,525 
Current assets                    
Inventories   23    593,009    622,679    464,216 
Prepayment and prepaid operating expenses        28,161    34,371    27,649 
Trade and other receivables   24    837,828    616,308    645,822 
Financial assets at fair value through profit or loss   21    41,685         
Financial assets at amortized cost   21    1,996,808         
Derivative financial instruments   21    2,583         
Other financial assets   21        683,812    31,543 
Restricted  cash   22    592,290    336,043    337,699 
Cash and cash equivalent   39    1,786,420    1,838,300    2,126,011 
         5,878,784    4,131,513    3,632,940 
Assets  classified  as  held-for-sale   25    270,807    37,471    50,813 
Total current assets        6,149,591    4,168,984    3,683,753 
Total assets        14,424,320    11,918,451    10,115,278 

 

 17 

 

 

(In USD’000)

 

   Notes   12/31/18   12/31/17   12/31/16 
Equity and liabilities                    
Capital and reserves                    
Ordinary shares, $0.004 par value, 10,000,000,000 shares authorized, 5,039,819,199, 4,916,106,889 and 4,252,922,259 shares issued and outstanding at December 31, 2018, 2017 and 2016, respectively                    
   26    20,159    19,664    17,012 
Share premium   26    4,993,163    4,827,619    4,950,948 
Reserves   27    109,346    134,669    93,563 
Retained earnings (accumulated deficit)   28    331,298    187,008    (910,849)
Equity attributable to owners of the Company        5,453,966    5,168,960    4,150,674 
Perpetual subordinated convertible Securities   29    563,848    64,073     
Non-controlling interests        2,905,766    1,488,302    1,252,553 
Total equity        8,923,580    6,721,335    5,403,227 
Non-current liabilities                    
Borrowings   30    1,760,763    1,743,939    1,233,594 
Convertible bonds   31    418,592    403,329    395,210 
Bonds payable   32        496,689    494,909 
Medium-term notes   33        228,483    214,502 
Deferred tax liabilities   10    1,639    16,412    15,382 
Deferred government funding   34    393,902    299,749    265,887 
Derivative financial instruments   21    15,540         
Other financial liabilities   21    11,948    1,919    74,170 
Other liabilities   21    39,128    99,817    37,497 
Total non-current liabilities        2,641,512    3,290,337    2,731,151 
Current liabilities                    
Trade and other payables   35    964,860    1,007,424    897,606 
Contract liabilities   5    44,130    43,036    42,947 
Borrowings   30    530,005    440,608    209,174 
Convertible bonds   31            391,401 
Bonds payable   32    498,551         
Short-term notes                86,493 
Medium-term notes   33    218,247         
Deferred government funding   34    244,708    193,158    116,021 
Accrued liabilities   36    164,604    180,912    230,450 
Derivative financial instruments   21    15,806         
Other financial liabilities   21        744    6,348 
Current tax liabilities   10    2,607    270    460 
Other liabilities   21    32,263    40,627     
         2,715,781    1,906,779    1,980,900 
Liabilities directly associated with assets classified as held-for-sale   25    143,447         
Total current liabilities        2,859,228    1,906,779    1,980,900 
Total liabilities        5,500,740    5,197,116    4,712,051 
Total equity and liabilities        14,424,320    11,918,451    10,115,278 

 

 18 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the years ended December 31, 2018, 2017 and 2016

 

(In USD’000)

 

   Ordinary
shares
   Share
premium
   Equity-
settle
employee
benefits
reserve
   Foreign
currency
translation
reserve
   Change in
value of
available-
for-sale
financial
assets
   Convertible
bonds
equity
reserve
   Defined
benefit
pension
reserve
   Cash flow
hedges
   Share of other
comprehensive
income of joint
venture
accounted for
using equity
method
   Others   Retained
earnings
(accumulated
deficit)
   Attributable
to owner of
the Company
   Perpetual
subordinated
convertible
securities
   Non-
controlling
interest
   Total
equity
 
   (Note  26)   (Note  26)   (Note  27)   (Note  27)   (Note  27)   (Note  27)   (Note  27)   (Note  27)   (Note  27)       (Note  28)       (Note  29)         
Balance at December 31, 2015   16,830    4,903,861    70,459    (3,956)   447    29,564                130    (1,287,479)   3,729,856        460,399    4,190,255 
Profit for the year                                           376,630    376,630        (60,196)   316,434 
Other comprehensive income (losses) for the year               (18,131)   798        1,520    (34,627)       1        (50,439)       (891)   (51,330)
Total comprehensive income (losses) for the year               (18,131)   798        1,520    (34,627)       1    376,630    326,191        (61,087)   265,104 
Exercise of stock options   140    36,064    (18,594)                                   17,610            17,610 
Share-based  compensation           13,838                                    13,838        372    14,210 
Capital contribution from non-controlling interests                                                       831,254    831,254 
Conversion  options  of  convertible  bonds  exercised  during  the  year   42    11,023                (821)                       10,244            10,244 
Recognition of equity component of convertible bonds                       52,935                        52,935            52,935 
Business  combination                                                       21,615    21,615 
Subtotal   182    47,087    (4,756)           52,114                        94,627        853,241    947,868 
Balance at December 31, 2016   17,012    4,950,948    65,703    (22,087)   1,245    81,678    1,520    (34,627)       131    (910,849)   4,150,674         1,252,553    5,403,227 
Profit for the year                                           179,679    179,679        (53,256)   126,423 
Other comprehensive income (losses) for the year               21,590    (2,356)       (436)   35,143    17,646    (131)       71,456        1,598    73,054 
Total comprehensive income (losses) for the year               21,590    (2,356)       (436)   35,143    17,646    (131)   179,679    251,135        (51,658)   199,477 
Issuance of ordinary shares   966    325,174                                        326,140            326,140 
Exercise of stock options   130    35,178    (18,220)                                   17,088        17    17,105 
Share-based  compensation           17,495                                    17,495        719    18,214 
Capital contribution from non-controlling interests                                                       294,000    294,000 
Conversion  options  of  convertible  bonds  exercised  during  the  year   1,556    427,168                (29,625)                       399,099            399,099 
Perpetual  subordinated  convertible  securities                                                   64,073        64,073 
Share  premium  reduction       (910,849)                                   910,849                 
Non-controlling interest on transfer of business operation                                           7,329    7,329        (7,329)    
Subtotal   2,652    (123,329)   (725)           (29,625)                   918,178    767,151    64,073    287,407    1,118,631 
Balance at December 31, 2017   19,664    4,827,619    64,978    (497)   (1,111)   52,053    1,084    516    17,646        187,008    5,168,960    64,073    1,488,302    6,721,335 
Adoption of IFRS 9                   1,111                (17,646)       16,535                 
Restated total equity at January 1, 2018   19,664    4,827,619    64,978    (497)       52,053    1,084    516            203,543    5,168,960    64,073    1,488,302    6,721,335 
Profit for the year                                           134,055    134,055        (56,844)   77,211 
Other comprehensive income (losses) for the year               (36,138)           129    35,931                (78)       219    141 
Total comprehensive income (losses) for the year               (36,138)           129    35,931            134,055    133,977        (56,625)   77,352 
Issuance of ordinary shares   474    160,404                                        160,878            160,878 
Cancellation of treasury stock   (76)   (19,981)                                       (20,057)           (20,057)
Exercise of stock options   97    25,121    (17,211)                                   8,007        69    8,076 
Share-based  compensation           10,912                                    10,912        749    11,661 
Capital contribution from non-controlling interests                                                       1,488,900    1,488,900 
Perpetual  subordinated  convertible  securities                                                   499,775        499,775 
Distribution to perpetual subordinated convertible securities                                           (6,300)   (6,300)           (6,300)
Deconsolidation of subsidiaries due to loss of control               (1,774)                               (1,774)       (15,629)   (17,403)
Share  of  other  capital  reserve  of  associates  accounted  for  using  equity  method                                       (637)       (637)           (637)
Subtotal   495    165,544    (6,299)   (1,774)                       (637)   (6,300)   151,029    499,775    1,474,089    2,124,893 
Balance at December 31, 2018   20,159    4,993,163    58,679    (38,409)       52,053    1,213    36,447        (637)   331,298    5,453,966    563,848    2,905,766    8,923,580 

  

 19 

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended December 31, 2018, 2017 and 2016

 

(In USD’000)

 

       Year ended   Year ended   Year ended 
   Notes   12/31/18   12/31/17   12/31/16 
Operating activities                    
Profit for the year        77,211    126,423    316,434 
Adjustments for:                    
Income tax expense (benefit)   10    14,476    1,846    (6,552)
Depreciation and amortization expense   11    1,048,410    971,382    729,866 
Expense recognized in respect of equity-settled share-based payments   11    11,661    18,214    14,210 
Interest income        (64,339)   (27,090)   (11,243)
Finance costs   8    24,278    18,021    23,037 
(Gain) loss on disposal of property, plant and equipment and assets classified as held-for-sale   7    (30,838)   (17,513)   1,846 
Gain on deconsolidation of subsidiaries        (3,466)        
Gain on disposal of associates            (18,884)    
Impairment losses on assets   11    16,567    46,720    1,024 
Net (gain) loss arising on financial instruments at fair value through profit or loss   9    (9,773)   (6,890)   7,617 
Net loss (gain) on foreign exchange        8,632    26,101    (26,236)
Share of (gain) loss of investment accounted for using equity method        (21,203)   9,500    13,777 
Other non-cash loss                175 
         1,071,616    1,147,830    1,063,955 
Operating cash flows before movements in working capital:                    
(Increase) decrease in trade and other receivables        (106,404)   59,084    (100,980)
Increase in inventories        (31,063)   (205,320)   (51,344)
Increase in restricted cash relating to operating activities        (325,512)   (81,795)   (147,834)
Decrease (increase) in prepayment and prepaid operating expense        2,000    (6,722)   17,615 
Decrease in other operating assets        6,660    2,938    1,576 
Increase in trade and other payables        56,598    109,285    72,836 
Increase (decrease) in contract liabilities        1,094    89    (13,790)
Increase in deferred government funding        143,485    110,999    126,845 
Increase (decrease) in other operating liabilities        17,866    (40,604)   25,031 
Cash generated from operations        836,340    1,095,784    993,910 
Interest paid        (47,850)   (34,086)   (27,497)
Interest received        34,840    19,425    12,464 
Income taxes paid        (23,904)   (437)   (1,675)
Net cash generated from operating activities        799,426    1,080,686    977,202 

 

 20 

 

 

(In USD’000)

 

   Year ended   Year ended   Year ended 
   12/31/18   12/31/17   12/31/16 
Investing activities               
Payments to acquire financial assets at fair value through profit or loss   (447,717)        
Proceeds from sale of financial assets at fair value through profit or loss   540,166         
Payments to acquire financial assets at amortized cost   (4,407,790)        
Proceeds from maturity of financial assets at amortized cost   2,954,346         
Payments to acquire financial assets       (829,371)   (917,272)
Proceeds on sale of financial assets       186,509    1,175,768 
Payments for property, plant and equipment   (1,808,253)   (2,287,205)   (2,757,202)
Proceeds from disposal of property, plant and equipment and assets classified as held-for-sale   398,162    688,192    259,799 
Payments for joint ventures, associates and other financial assets   (427,197)   (467,885)   (87,645)
Proceeds from disposal of joint ventures and other financial assets   9,251    1,028    5,523 
Distributions received from joint ventures and associates   12,322    255    2,027 
Payments for intangible assets   (9,817)   (43,755)   (85,729)
Payments for land use right   (14,425)        
Payments for deposit of investing activities   (45,503)        
Proceeds from release of restricted cash relating to investing activities   54,743    90,093    34,614 
Net cash outflow from deconsolidation of subsidiaries(1)   (5,549)        
Payment for business combination           (73,216)
Net cash used in investing activities   (3,197,261)   (2,662,139)   (2,443,333)
Financing activities               
Proceeds from borrowings   782,402    1,194,659    1,239,265 
Repayment of borrowings   (536,752)   (537,016)   (228,928)
Proceeds from issuance of new shares   160,878    326,351     
Proceeds from issuance of convertible bonds           441,155 
Proceeds from issuance of short-term and medium-term notes           314,422 
Repayment of short-term notes       (87,858)    
Proceeds from issuance of perpetual subordinated convertible securities   499,775    64,350     
Distribution paid to perpetual subordinated convertible securities holders   (6,300)        
Proceeds from exercise of employee stock options   8,076    17,105    17,610 
Payments to acquire treasury shares   (20,057)        
Proceeds from non-controlling interests — capital contribution   1,488,900    294,000    831,254 
Net cash from financing activities   2,376,922    1,271,591    2,614,778 
Net (decrease) increase in cash and cash equivalent   (20,913)   (309,862)   1,148,647 
Cash and cash equivalent at the beginning of the year   1,838,300    2,126,011    1,005,201 
Effects of exchange rate changes on the balance of cash held in foreign currencies   (16,413)   22,151    (27,837)
    1,800,974    1,838,300    2,126,011 
Cash and cash equivalent of disposal group as held-for-sale   (14,554)        
Cash and cash equivalent at the end of the year   1,786,420    1,838,300    2,126,011 

 

(1)The net cash outflow was from deconsolidation of subsidiaries due to the Company lost control of Ningbo Semiconductor International Corporation on April 13, 2018. Please refer to Note 19 for more details.

 

 21 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 31, 2018

 

1.GENERAL INFORMATION

 

Semiconductor Manufacturing International Corporation (the “Company” or “SMIC”) was established as an exempt company incorporated under the laws of the Cayman Islands on April 3, 2000. The address of the principal place of business is 18 Zhangjiang Road, Pudong New Area, Shanghai, China, 201203. The registered address is at P.O. Box 2681, Cricket Square, Hutchins Drive, Grand Cayman KY1-1111, Cayman Islands. Semiconductor Manufacturing International Corporation is an investment holding company.

 

Semiconductor Manufacturing International Corporation and its subsidiaries (hereinafter collectively referred to as the “Group”) are mainly engaged in the computer-aided design, manufacturing, testing, packaging, and trading of integrated circuits and other semiconductor services, as well as designing and manufacturing semiconductor masks. The principal subsidiaries and their activities are set out in Note 18.

 

These financial statements are presented in US dollars, unless otherwise stated.

 

2.APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”)

 

NEW AND REVISED IFRSs THAT ARE MANDATORILY EFFECTIVE FOR THE YEAR ENDED DECEMBER 31, 2018

IFRS 9 Financial Instruments

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.

 

The adoption of IFRS 9 Financial Instruments from January 1, 2018 resulted in changes in accounting policies and adjustments to the amounts recognized in the financial statements. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated.

 

On January 1, 2018 (the date of initial application of IFRS 9), the Group’s management has assessed which business models apply to the financial assets held by the Group and has classified its financial instruments into the appropriate IFRS 9 categories.

 

(i)Classification and measurement
(1)Reclassification from available-for-sale to fair value through profit or loss (“FVPL“)

The group elected to present in profit or loss changes in the fair value of all its equity investments previously classified as available-for-sale, because these investments are held as long-term strategic investments that are not expected to be sold in the short to medium term. As a result, assets with a fair value of US$24.8 million were reclassified from available-for-sale financial assets to financial assets at FVPL on January 1, 2018.

 

Related gains of US$16.5 million were transferred from reserves to retained earnings on January 1, 2018. For the year ended December 31, 2018, net fair value gains of US$2.0 million relating to these investments were recognized in profit or loss.

 

(2)Reclassification from other financial assets to FVPL

Certain investments in financial products sold by banks were reclassified from other financial assets to financial assets at FVPL (US$117.9 million as at January 1, 2018). They do not meet the IFRS 9 criteria for classification at amortized cost, because their cash flows do not represent solely payments of principal and interest.

 

(3)Reclassification from other financial assets to amortized cost

Certain investments in over 3 months bank deposits were reclassified from other financial assets to amortized cost (US$559.0 million as at January 1, 2018). At the date of initial application the Group’s business model is to hold these investments for collection of contractual cash flows, and the cash flows represent solely payments of principal and interest on the principal amount. There was no impact on retained earnings at January 1, 2018.

 

 22 

 

 

2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) (continued)

 

NEW AND REVISED IFRSs THAT ARE MANDATORILY EFFECTIVE FOR THE YEAR ENDED DECEMBER 31, 2018 (CONTINUED) 

IFRS 9 Financial Instruments (continued)

(ii)Impairment of financial assets

The Group has the following types of financial assets subject to IFRS 9 new expected credit loss model:

 

Trade receivables; and

 

Other financial assets at amortized cost.

 

For trade receivable, the Group applies the simplified approach for expected credit losses prescribed by IFRS 9. Based on the assessments performed by management, the changes in the loss allowance for trade receivables are insignificant.

 

Impairment on other financial assets at amortized cost is measured as either 12-month expected credit losses or lifetime expected credit loss, depending on whether there has been a significant increase in credit risk since the initial recognition. Based on the assessments performed by management, the changes in the loss allowance for other financial assets at amortized cost are insignificant.

 

IFRS 15 Revenue from Contracts with Customers

The new IFRS 15 standard establishes a single revenue recognition framework. The core principle of the framework is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. IFRS 15 supersedes existing revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations.

 

IFRS 15 requires the application of a 5 steps approach to revenue recognition:

 

Step 1: Identify the contract(s) with a customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to each performance obligation

 

Step 5: Recognize revenue when each performance obligation is satisfied

 

IFRS 15 includes specific guidance on particular revenue related topics that may change the current approach taken under IFRS. The standard also significantly enhances the qualitative and quantitative disclosures related to revenue.

 

The standard permits either a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Group has performed a detailed assessment on the impact of the adoption of IFRS 15 and decided to adopt a full retrospective approach. The adoption of IFRS 15 did not have any significant impact on the Group’s financial statements.

 

The Group has adopted IFRS 15 Revenue from Contracts with Customers from January 1, 2018 which resulted in changes in accounting policies and adjustments to the amounts recognized in the financial statements. In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules retrospectively and has restated comparatives for the 2017 financial year. Contract liabilities has been presented in the balance sheet to reflect the terminology of IFRS 15, in relation to advance payment received from customers were previously included in trade and other payables (US$43.0 million as at January 1, 2018). Based on the assessment, the timing of revenue recognition on sale of goods is nearly unchanged.

 

 23 

 

 

2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) (continued)

 

NEW AND REVISED IFRSs THAT ARE MANDATORILY EFFECTIVE FOR THE YEAR ENDED DECEMBER 31, 2018 (continued)

Impact on the financial statements

 

The following tables show the adjustments as the impact of the adoption of IFRS 15 and IFRS 9 on the Group’s financial statements and also disclose the new accounting policies that have been applied from January 1, 2018, where they are different to those applied in prior periods.

 

The Group has adopted IFRS 15 retrospectively with restating comparatives for the 2016 and 2017 financial years.

 

(In USD’000)

 

       Impact on           Impact on     
   12/31/16   IFRS 15   12/31/16   12/31/17   IFRS 15   12/31/17 
   As           As         
Consolidated statement of   originally    Contract         originally    Contract      
financial position (extract)   presented    liabilities    Restated    presented    liabilities    Restated 
Trade and other payables   940,553    (42,947)   897,606    1,050,460    (43,036)   1,007,424 
Contract liabilities       42,947    42,947        43,036    43,036 
    940,553        940,553    1,050,460        1,050,460 

 

The Group has adopted IFRS 9 without restating comparative information as at December 31, 2017.

 

(In USD’000)

   12/31/17           Impact on IFRS 9           01/01/18 
       Cross   Foreign   Financial   Over             
   As   currency   currency   products   3 months             
Consolidated statement of   originally    swap    forward    sold    bank    Equity    Contingent      
financial position (extract)   presented    contracts    contracts    by banks    deposits    securities    consideration    Restated 
Non-current assets                                        
Other assets   42,810                        (24,844)        17,966 
Financial assets at fair value through profit or loss                           24,844         24,844 
Derivative financial instruments       17,598                            17,598 
Other financial assets   17,598    (17,598)                             
Current assets                                       
Financial assets at fair value through profit or loss                  117,928                  117,928 
Financial assets at amortized cost                       559,034             559,034 
Derivative financial instruments        4,739    2,111                       6,850 
Other financial assets   683,812    (4,739)   (2,111)   (117,928)   (559,034)