indie Semiconductor, Inc.

Welcome to Semiconductor Manufacturing International Corporation's first quarter 2022 webcast conference call. Today's call will be simultaneously streamed through the internet and teleconference. Please be advised that if you join the meeting by phone, your dial-ins are in listen-only mode. However, after the conclusions of the management's representation, we will have a question-and-answer session. At this time, you will receive instructions on how to participate. Without further ado, I would like to introduce Ms. Guo Guangli, Vice President, Board Secretary, and Joint Company Secretary to speak.

Greetings. Welcome to SMIC's first quarter 2022 webcast conference call. Attending today's call are Dr. Gao Yonggang, Chairman, Dr. Zhao Haijun, Co-Chief Executive Officer, and Dr. Liang Mengsong, Co-Chief Executive Officer. 在此提醒各位,我们今天的表述包括前瞻性陈述是对未来业绩的预测而非保证。

Let me remind you that today's presentation includes forward-looking statements that do not guarantee future performances but represent our estimates.

and are subject to risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings statement is presented in accordance with International Financial Reporting Standards, IFRS, and all currency figures are in U.S. dollars unless otherwise stated. 首先,我们有请高永刚博士讲话。 First of all, we invite Dr. Gao Yonggang to speak.

Greetings to all. In the first half of 2022, events such as the epidemic and local conflicts occurring overseas

have brought uncertainties to the development of the global IC industry. While the demand for consumer electronics is soft, the demand for growth in new energy vehicles, display panels, and industrial sectors has led to a shortened intensification of the structural shortage of semiconductor manufacturing capacity. Thanks to the company's planning and deployment to address the shortage in the market, In the past six months, the company has carried out early capacity allocation optimization and adjustment and orderly promoted capacity construction. This year, the cities where some of the company's fabs are located have experienced the epidemic at different times. Facing this challenge, the company went full force to implement various preventative and control measures. On one side, guard against the epidemic to build a safety barrier for employees, ensure production and make every effort to assure customer demand. On the other side, the company has not forgotten to fulfill its social responsibility and donated 10 million RMB to support Shanghai's epidemic prevention and anti-epidemic work. 在全体员工的努力与付出下,

With the efforts and dedication of all employees,

The company maintains solid momentum in the first quarter and revenue is expected to continue to grow in the second quarter. Based on the company's growth expectation in the first half of the year and with the gradual release of capacity, if there is no significant material adverse change in external conditions, it is expected that our annual revenue growth rate this year will be better than the foundry industry average, and the company's gross margin will be better than expected at the beginning of the year. Thank you.

Thank you, Dr. Gao.

Next, I will introduce the company's financial status. First, I will report our inauditive financial results for the first quarter, followed by our guidance for the second quarter. Unless otherwise stated, the following financial data is presented in accordance with IFRS.

In the first quarter, sales revenue and net profit remained growing. Sales revenue was $184,200,000, which increased by 16.6%, and increased by 66.9%. Net profit was 40.7%, which increased by 5.7%, and increased by 18%. The operating profit of the first quarter is $53,600,000, with a 27.6% growth rate and a 330% growth rate. The operating profit of this company is $44,700,000. The operating profit of the non-control authority is $12,200,000.

Both revenue and growth margin for the first quarter maintained growth. Revenue was $1,842 million, up 16.6% sequentially and 66.9% year-over-year. Growth margin was 40.7%, up 5.7 percentage points sequentially and 18 percentage points year-over-year. Profit from operations was $536 million, up 27.6% sequentially, and 330% year-over-year. Profit attributable to the company and non-controlling interest were $447 million and $122 million, respectively. 关于资产负债,在一季度末,

The company's total assets amounted to $3.75 billion, of which the inventory cash amounted to $1.73 billion. The total debt amounted to $1.1 billion, of which the liabilities amounted to $6.7 billion. The total interest amounted to $2.63 billion. The total liabilities amounted to 25.4%

Moving to the balance sheet, at the end of the first quarter, the company had total assets of $37.5 billion, of which total cash on hand was $17.3 billion. Total liabilities were $11.1 billion, of which total interest bearing debt was $6.7 billion. Total equity was $26.3 billion. Total debt to equity was 25.4%, and net debt to equity was negative 40.2%.

In terms of cash flow, in the first quarter, we generated $1,593 million cash from operating activities. Net cash used in investing activities was $4,266 million.

Net cash from financing activities was $188 million. For the second quarter 2022, our guidance is as follows. Revenue is expected to grow 1% to 3% sequentially, and growth margin is expected to be in the range of 37% to 39%. Non-IFIS operating expenses are expected to increase sequentially. while profits attributable to non-controlling interests are expected to decrease quarter over quarter.

This concludes the financial status. Next, let me recap the relevant matters related to the company's 2021 annual report.

According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profits during the annual reporting period and its accumulated undistributed profits are positive but no cash dividends are distributed, the company should provide a key explanation on matters related to the cash dividend plan in the earning webcast after the disclosure of the annual report and before the record day of the annual general meeting.

The net cash flow generated by the business activities in 2021 deducted the 75 billion RMB from the free net cash flow obtained after building fixed assets, formless assets and other long-term asset payments. In 2022, the company's planned capital expenditure will be 3.2 billion RMB. comprehensive consideration of the current business situation and future development factors. The company does not carry out profit allocation in 2021. This arrangement is more in line with the long-term development needs of the company and the long-term interests of the shareholders. It is also in line with the rules of law and regulations and the policy of profit allocation policy of the company. There is no harm to the company The company's 2021 key financial metrics

significantly improved as compared to that of previous year. According to China accounting standards, by the end of 2021, the accumulated undistributed profit was 18.8 billion RMB. In 2021, the net cash flow generated from the company's operating activities after deducting cash paid for the purchase and construction of fixed assets intangible assets, and other long-term assets resulted in a negative free cash flow of 7.5 billion RMB. The company announced its CAPEX plan of 2022 to be around 32 billion RMB. Taking into account the company's current operating situation and future development and other factors, the company plans not to distribute profits for the year of 2021, which is in line with the company's long-term development needs and the long-term interests of shareholders, and in accordance with relevant laws and regulations, regulatory documents, and the company's profit distribution policy. There are no circumstances that harms the interests of the company and its shareholders. The plan has been reviewed and approved by the Board of Directors and published in the annual report and will be submitted for approval at the annual general meeting on June 24th. We would like to thank our shareholders for their understanding and support. 接下来,有请赵海君博士介绍市场、运营和各公益平台的情况。 Next, I will hand the call to Dr. Zhao Haijun to comment on market operations and technology platforms. 大家好,感谢大家参加一季度业绩说明会。

In the past few years, the continuous upgrading of electronic products, the interaction of all things, the large digital trend, the increase in body weight in the cloud, the increase in the number of cars' electronic demand, the rise of green energy and other industries, etc. In general, the demand and increase in the end-to-end demand has not yet been satisfied. And the average growth of the global integrated circuit energy production capacity is still growing at various levels. Even though in the past two years, Jinyuan Factory has accelerated the construction of production capacity, but due to the lack of supply chain, the capacity of the sound accessories is still unable to be built in a short time. The industrial transition has accelerated the localization of middle-end customers and the localization of production needs for supply chain regionalization concerns, and also produced a localization of the lack of production capacity.

Hello everyone, and thank you for attending the first quarter earnings webcast. In the past few years, with the continuous upgrading of electronic products, the interaction of everything, digitalization megatrends, cloud storage volume increase, the exponential rise in demand for automotive electronics, the rise of green energy and other industries, and so on, The overall incremental demand for end-user silicon content has not been met, while the average annual growth of global IC manufacturing capacity fluctuates only within the single digits. And even so, FABs have accelerated their pace of capacity construction in recent two years. The corresponding supporting capacity still cannot be built in place in a short period of time due to the pipe supply chain. The shift of the industry and concerns about regionalization of the supply chain segmentation have exacerbated the capacity gap for localized production demand.

In February this year, we also shared our views. As we expected, after half a year of market-accelerated consumption and storage accumulation, especially after China entered the control and control epidemic stage, The trend of industry growth has shifted from complete scarcity to structural scarcity. The storage market, such as consumer electronics and mobile phones, has entered the stage of storage, and has begun to weaken. And the high-end Internet, electric vehicles, display, green energy, industry, and other increasing markets have not yet established sufficient storage. This has raised higher and more urgent requirements for productivity, technical innovation, and customer experience services. In February this year, we also shared with you our views that, as we expected, after the accelerated market consumption, inventory accumulation in the past six months,

especially after China entered into the stage of strict epidemic control. The industry supply and demand trend has shifted from overall shortage to structural kindness. Some existing markets, such as consumer electronics and mobile phone, et cetera, have moved into destocking stage and hopefully can be soft-landed soon. while incremental markets such as high-end IoT, electric vehicle, display, green energy, and industrial still lack sufficient inventory, putting forward higher and more urgent requirements for production capacity, technological innovation, and customer experience services. In order to respond to the needs of the industry supply chain, the company has launched new product process platforms improve customer service, and implemented our tactic direction by securing the existing volume and expanding their incremental volume.

In addition to closely monitoring the industrial dynamics, the evolution of the epidemic has also tested the company's ability to respond to risks. The company manages its production in a multi-faceted manner. The first time, it carried out a closed-off operation, implemented location division and classification management, disassembled transportation logistics, and secured logistics maintenance equipment, stocked up on preventive materials, and made emergency processing plans and work guarantees. The company has a firm conscience. Basically, it guarantees the continuity of production and operation and the delivery of orders to customers.

In addition to closely tracking industry dynamics, the evolution of the epidemic has tested the company's risk response capabilities. The company has taken a multi-pronged approach to ensure safety and production with one hand, immediately carry out closed-loop operations, implement zoning and classification management of the premises, and unclog transportation and logistics. With the other hand, administration logistics were secured and morale rally. Epidemic prevention supplies were stopped and emergency response plans and job security were prepared. The company is united and basically ensures the continuity of production and operation and the delivery of customer orders in an orderly manner.

In the first quarter, the sales revenue of the company exceeded $1.8 billion, and the profit margin exceeded 40%. The momentum of growth came from the optimization of product combinations and price adjustment. Overall, the average unit price increased by 13%, and the output amount increased by 7%. The profit margin exceeded the guide. There are two main factors. One is that due to the epidemic, the company put the annual maintenance The second is that the impact of the epidemic on the Tianjin and Shenzhen factories is lower than expected. According to the area of ​​sales revenue, China's domestic and Hong Kong, North America and Europe and Asia regions account for 68%, 19% and 13% respectively. There is an increase in income in each area, and the capital is divided according to application. smart phones, smart homes, consumer electronics, and other electronic categories, respectively, increased by 29%, 14%, 23%, and 34%, with an increase of 1% to 30%. Among them, the percentage of consumer electronics in smart phones has dropped, and the percentage of smart homes and other categories has risen, in line with the deployment of market demand, judgment, and production distribution of companies.

With the concerted efforts of all, in the first quarter, the company's revenue exceeded $1.8 billion and growth margin exceeded 40%, driven by a 13% sequential increase in ASP due to product mix optimization and price adjustment, and a 7% sequential increase in shipment. Growth margin exceeded guidance primarily due to two reasons. First, due to the epidemic, the company postponed the scheduled annual maintenance of some FABs. Second, the impact of the epidemic on the Tianjin and Shenzhen FABs was lower than expected. Revenue by region, Chinese mainland and Hong Kong China, North America, Europe, and Asia accounted for 68%, 19%, and 13% respectively, with revenue growth in each region. With revenue by application, smartphones, smart homes, consumer electronics, and other categories accounted for 29%, 14%, 23%, and 34%, respectively, with revenue growth of 10% to 30% for each category, while smartphones and consumer electronics accounting for a decline and our smart home and other categories accounting for an increase. in line with the company's judgment on market demand and capacity allocation deployment.

In the second quarter, due to the delay in some factories' annual maintenance to this quarter, and the short-term impact of the pandemic on the production efficiency rate of Shanghai factories, the company expects sales revenue to increase by 1% to 3%, and the profit margin between 37% and 39%. The profit margin is predicted to decrease by 1%, In the second quarter, the company expects revenue to increase 1% to 3% sequentially.

and growth margin to be in the range of 37% to 39% due to the deferral of annual maintenance at some FAPs into the current quarter and the shortened impact of the epidemic on utilization at the Shanghai FAPs. Growth margin is expected to be down sequentially also due to the gradual reflected impacts of increase in depreciation of new capacity and higher cost of raw materials and labor. The current impact of epidemic on the production of the Shanghai fab will be remedied gradually through subsequent accelerating of production and output growth of other fabs. This year's CAPEX and expansion of capacity is progressing as planned. The company added 28,000 8-inch equivalent wafers monthly capacity in the first quarter. It is expected that by the end of this year, the capacity increment this year will exceed that of last year. 从今年一季度开始,

The company's report turned into a 8-inch, 12-inch income ratio. 8-inch covers a range of 0.35 micrometers to 90 nanometers. 12-inch covers a range of 90 nanometers to FinFET. This way of publishing is more suitable for the company to cross multiple nodes in the same factory, multiple node applications of operation flexibility and business characteristics.

Since the first quarter, the company starts to disclose the revenue contribution of 8-inch and 12-inch respectively. 8-inch covers the processes from 0.35 micron to 90 nano, while 12-inch covers the processes from 90 nano to thin-fat. This kind of disclosure is more in line with the company's operation flexibility and business features. with SYNFAB running multiple nodes and applications.

Overall, the impact of the pandemic and the European war on the company has not been too much, but the long-term impact of logistics has caused some of the business lines to be disturbed, short-term structural shortcomings, and increased tension. Overall, the customer demand is still high, and it is expected that the company's production capacity will still be announced this year.

All in all, the heat from the epidemic and the local war in Europe has been mitigated correspondingly without much impact on the company, but the impact on the non-logistic supply chain has disturbed existing business lines. and the structural shortage has become intensified. Overall, customer demand remains strong, and the company's capacity is expected to remain tight throughout this year. The company will continue its strategy of seeking progress in a stable manner, keeping its feet on the ground and walking the talk to fulfill its promises to customers.

Finally, we would like to thank all employees, customers, suppliers, investors, and community for their trust and support. Thank you all.

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

Thank you. At this time, if you'd like to ask questions, please press star 1. First question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.

Yes, thank you. Yeah, good job managing through the COVID-19 so far. The first question I wanted to ask on the 1% to 3% growth, How much you view sales impacted by the COVID-19 disruptions? And for the gross margins, how much impact from the maintenance you discussed? And as we look at second half, as you come out of that, should we expect the sequential growth to ramp a bit faster?

Hi, Randy. And thank you for the first questions. Talking about the numbers for revenue growth, only showed up to 1 to 3 percent in the second quarter. And we say that because the postpone of the APM. And usually for this kind of APM, it happens two to three days. But to the disruption of manufacturing can be up to five to six days. Right away, you can calculate five to six days divided by 92 days in the second quarter. More or less, that's the impact for the production. And for the gross margin from this kind of pandemic, we haven't got the detailed numbers, but we do see some delays or some disruption. And we first start doing this kind of pandemic timings. Until today, we are still in the process of this kind of defensing pandemic. Haven't finished yet. So we can't give the exact number. But we already put enough buffer there for this kind of forecast.

I follow up on that question. The five to six days, do you make that up?

like should we see third quarter you would have a normal quarter plus you can make some up and then could you give an update how capacity would sequentially ramp up in the coming quarters since you've been okay I'll give you that yes I'll come to that Randy usually for this kind of APMs I knew preventive maintenance and this kind of pandemic interruptions and that time's gone just gone but we do not have any counseling of customer orders. That means we will use the future days, future months to expedite the manufacturing to recover this kind of appeal gaps. Basically, we have additional capacity added on to the existing capacity. Just now, we mentioned that For the first quarter, we have 28,000 per month type of addition of capacity normalized. And we believe that we will have a similar capacity add-on in the second quarter. By doing that, by making that, we will have additional capacity recover the capacity we lost in the first quarter. So more or less, we promised to customers that we do not have any counseling of the wait for orders, and we will make up the shipments in the coming days. And by the simple calculation, you asked whether or not removing this kind of APM effect after the finish of this pandemic firefighting was our goal. And the revenues are gross margin. And more or less, when you compare the first quarter and second quarter gross margin, you'll come to the point that without this kind of APM, without this kind of pandemic fighting, how much we can recover. But we do factor in additional factors that, one, is additional capacity. with a heavier depreciation ratio. For the existing capacity, and they already have a certain part of machines already out of the depreciation period. And so the add-on capacity got a higher depreciation ratio. And the second factor, even though small, but it's still a factor again, is the additional price rising for the materials. For the first quarter, more or less, we still have a lot of wafer started in the last quarter, last year. And we also have a lot of materials, the parts, they are stocked last year, so they have a lower price. But the refurbishing materials, they come in, they have a higher price. Normalized, this year, the incoming materials, consumable materials, they have a 10%. higher price than that of last year. So when we factor in these kind of factors, and then we can come to the revenue growth and growth margin recovery.

Okay. If I could ask one more just on the customer momentum, because you mentioned tight through the year. We've noticed they have been growing quickly. on revenue, but also have been building up inventory as well. What's your take on the inventory levels and feedback from customers if they want to keep the levels where they are or start to deplete inventory, and could that be a headwind?

Yeah, Randy. And just now, if you notice, the numbers were shared with everyone, and the mobile phone ICs already lowered down to 29% only. This mobile phone, smartphone type of things used to account for a 50%, 40% something of a fund rate revenue, but to us and it's already lower than 30%. That means we already adjusted capacity to this area and a lot. And basically we should say for smartphones, consumer products, PCs, and internet, this kind of area, And they drop like a rock, very seriously. Some customers hold on 50, no 50, five months type of inventory on the supply chain to the mobile phones. For this kind of area, the oversupply is very serious. And they are happening very quickly. Currently, at the meeting time of today, I really believe they already happened. in a very serious situation of the high inventory. And these kind of customers, more or less, they already stopped the wafer ordering. They already stopped the shipments of their wafers. But even for these kind of mobile phones, consumers, PCs area, there are still some parts still in a very big shortage, like the power management, like the AMOLED drivers, and analog-related, and also the other IC parts for the industrial and the new energies, like MCUs, like Wi-Fi 6, like the power management. They are still in a huge shortage. So just now, we say that at this moment, we already found, already saw a certain area in a very big oversupply. some of the customers are holding more than five months of type of inventory. But in the other area, the parts are still in a very big shortage. And we should say that the power management, the analog, IMCUs, for the industry, for the electric cars, for the green energy, they are still in a very big shortage. And for the Wi-Fi 6, for the IoT, they are still in a relatively short. type of supply. Another thing I'd like to share with you is the market difference. If the customers only serve Chinese markets, they possibly are in the over-inventory stage. If the customer handles a lot on the recovering markets of the United States and the European and the other overseas markets, possibly in a very good situation. We really see very quick recovery of the American markets, European markets, overseas markets. But we are seeing the static and over-inventory stage of Chinese markets. Randy, that's my answer. Okay, great.

Okay, thank you. Appreciate the cover.

Sure, thanks. Thank you for the questions. I'll move on to the next question from Zihao Ng from China Renaissance. Please go ahead.

管理层,早上好。 我有两个问题想跟你们请教的。 第一个就是现在我们有些厂房都在闭环管理。 Q1看起来影响不大大, 但是假如延续到Q2或是Q3的交换之下, 对我们整体的productivity会作出一些压力吗? 好的,Zihao,谢谢你问问题。

Ah. Ah. There is also an impact, but it is not very big. One is that the impact on the entire company in Tianjin region is very small. The second is that Tianjin's business will probably end in 9 to 11 days. So its result is very clear. If there is an impact, there will be an impact. If there is no impact, there will be no impact. Then our Tianjin factory, 8 inches, is also an increasing unit. So by increasing, the original impact part is all smoothed out. This is what we just talked about. So in the first quarter, the impact of the COVID-19 pandemic on China and the international community was smaller than we had expected. In the second quarter, you asked, we are also doing a closed loop, mainly in Shanghai. But the current epidemic in Shanghai is still in progress. We still have no way to make a very accurate and complete impact. How big is the impact? The impact is there. So far, it is not particularly big. The second thing is that the impact on the factory is one thing, but the impact on the entire chain is another thing. That is to say, we have an impact here, but the wafers we produce, are they able to affect this proportion in the following seal testing and transportation? The answer is no. The impact on the entire chain is greater. How big is this? We still have to wait for the second quarter or until the end of the pandemic in Shanghai before we can give a definite answer. I understand.

But now we see that some of the affected orders will be delayed to the second half of the year.

Now we are at the moment, until today, when we open this communication meeting, we are now The order that was delivered in the second quarter, in May, and in April, will be restored by the end of the second quarter, at the end of June. That is, the customer has sent the order a little later than the previous one, but by the end of June, it can still be delivered. But from today to the end of the next time, the further impact may not be able to end in the second quarter.

I understand. Okay. Another question I would like to ask is whether the mass production of Shenzhen's JB factory is still the same as it was in the second half of this year? No, it hasn't changed. Shenzhen is an 8-inch factory. It has also expanded.

It is a relatively long-term factory that has been increasing. This increase is still in line with expectations. The introduction of 12-inch factory equipment actually started last year. 那现在呢,就是一直在做市产。 那我们原来跟大家公告今年年底实现量产,这件事是可以做到。 好的,好的,好的,谢谢你,好,感谢你。 谢谢,谢谢子。 谢谢你的提问。 Next question comes from the line of Le Ping Huang from Huatai. Please go ahead.

Thank you for the opportunity. I have two questions. The first question I would like to ask Mr. Gao and Mr. Zhao is about the impact of the epidemic. One is that we have a relatively strong $5 billion project this year. We don't know if it will expand under the epidemic. We are expanding in three factories at the same time. Will the progress of the expansion be affected? The second is that there may be a relatively Mr. Haijun.

Thank you for your question, Le Ping. You are talking about the production and expansion of coins. Let's talk about the expansion first. The whole world is not satisfied with the supply and demand of the industrial chain. The supply and demand of the industrial chain is very tense. The relationship with the epidemic is relatively small. The main thing is that the suppliers deliver and postpone. They postpone for several months, and then there are relatively few flights of sea and air transport. Until the last few days, it is our factory, for example, whether the supplier can enter the factory and then the installation speed is not fast enough. This part does not have much impact. The main thing is the supply of the entire industrial chain. Now, we are under a new influence. We are trying to fulfill the promise we made to our clients that we will deliver our production capacity on time. There are difficulties and influences. We are still trying to do this. But when we talked to our clients about how much production capacity we can deliver, we already predicted the delay and the epidemic. We have already added the consideration of the impact of the epidemic. Now it's basically like this, that is to say, there is an impact, but it may affect the delay, the delay is not very much. We are still working hard to pull forward. That may appear a little bit behind what was originally said, but the degree of this backwardness is not very big. The second point you said that we are doing production in this loop, is it basically not affected? In fact, it is affected. I just asked this question in front of Z. We are talking about the impact. Now, we are still working hard to make up for it in the later period, or to use cities outside of Shanghai to make up for it. The impact that has already been affected is basically to make up for it by the end of June. But now, if the epidemic continues, it may not be able to make up for it. The impact of loss is big enough. It may be delayed to the next quarter to make up for it again. But so far, we have not cancelled the orders of our customers.

We have only delayed some deliveries.

Let me add one more thing. The pandemic has indeed had an impact on production in all aspects, as mentioned by the Navy. But just like what we announced before, so far, we have not mentioned the impact of the first quarter. As for the second quarter, some factories in the Shanghai factory area has had a short-term impact. As Haijun said, the pandemic is not over yet. The overall impact is still hard to judge. But the pandemic has indeed had an impact on logistics, supply chains, and companies above and below. It has had an impact on the progress of our production and delivery, but we are now working hard to reduce the impact to the lowest possible level. The impact on production Then we have considered this factor when setting the second quarter indicator, but it is not necessarily considered so comprehensively. Now it is expected to do so according to a 5% or so impact. We are trying to control it within such a range. You asked for a fixed number. I also asked for a specific number in the previous questions. But we don't want to disclose the exact number because the epidemic prevention and control is not over yet. The impact on the upstream oil production chain and the impact on us is also hard to determine. Because a large number of companies have resumed production, and the quality of the products after resuming production I don't know.

I have a second question, Mr. Gao. The global inflation is a hot topic. We are happy to see that the price of single-use products in the first quarter rose by 13% and the interest rate rose by 40%. At the same time, we also see that the price of raw materials, including chips, and various gases, including equipment, is also rising. How do we look at the overall situation? Utilities.

water, electricity, gas, and heat. This is managed by the government. The growth rate is still very high. And then the raw materials are all rising. The high ones are rising by more than 30%. The low ones are also rising by more than a few percent. They are not rising very much. Because we originally have a part of the storage In addition to the increase in prices this year, we had a forecast for the outside world. We thought that the price increase would increase the cost of production, and the salary of the employees. This may reduce our cost by 10%, or at least reduce the profit margin by 10%. Of course, we also discussed with our clients how to adjust the price. So the first one is the revenue that appeared in the first quarter. A lot of wafers were launched last year. For example, in November and December last year, they used a lot of materials at the original price. It may be a little less this year. In the second quarter and the third quarter, more and more materials are used at the new price this year. So I was just saying that in the future, when we continue to increase the amount, the cost of new production equipment is also higher. and the cost of the new materials is high, it will slowly show up, so it will hinder our interest rate. We have listed these as two factors that will affect our interest rate in the next quarter. One is the pandemic and the delay in maintenance. The second is the increase in materials and savings. Of course, there are also the factors of inflation, whether there is a business binding, a period of time before the price increase, and so on. At SMIC, one principle is still to have a friendly negotiation with customers, and then consider long-term strategic cooperation. Because we are a company that can grow very fast, we have to work with customers with long-term development potential. The customers also need to be profitable and have enough money to invest in their new products and new developments, so that everyone can achieve a long-term win-win situation, rather than making more money in the short term. It's all done through negotiation. It's okay now. Thank you for the questions. Next question comes from the line of Andrew Liu.

from Sinolink Securities. Please go ahead.

Thank you. This is the first question. Okay, Andrew.

This mobile phone brand, home appliances, has a great impact. They used to be sold in Russia and Ukraine, but now they are no longer sold. These places have no revenue at all. And then the domestic epidemic, everyone is delivering goods, or shops, these sales are gone. That has a great impact. This has become Now, at least 200,000 steps have to be reduced. And the reduction of these 200,000 steps is basically the number of Chinese mobile phone manufacturers. Most of them are happening in Chinese sales and Chinese mobile phones. This cancellation of orders is very powerful. Now, many orders have been cancelled. However, as I said earlier, the product is not in a good condition. Even in mobile phones, for example, its power management, its fast charging is still lacking, its Wi-Fi 6 is still lacking. But if he says the photos in his phone, that is, the high-end use is also very small. In order to sell more, everyone likes to use mid-range cameras, so they don't want particularly high-end or particularly low-end ones. He had a product switching process. This is still quite powerful. In terms of PCs, although the growth of PCs has completely ended, there is no more home office or home learning. However, a lot has been added to PCs, such as power management and power supply. These Wi-Fi 6s are still lacking. In other words, the connectivity used in the past, for example, Wi-Fi 4, Wi-Fi 5, Basically, this won't work. The original CMOS images, low-end and especially high-end, won't work. So these are all in the market. Everyone knows which products are now stored very high, more than five months, and which products are still very low. In fact, everyone knows. We actually have a big screen of TV driving here a while ago. A while ago, we started discussing this matter and also shared it with you. What everyone can do. These may not work. It must be too much. Only one or two can do it. Or you can develop it with users alone. These may be better. There is also an international head customer. He must be good. It must be bad in the back. It must be good to do international market. It must be bad to do only the Chinese market. So if you use these three conditions to see who has stock, you can immediately see it. You do what everyone can do, you must have stock. You only do the Chinese market, not the international market, you must have stock. If you are not a leading company, you must have stock. That's about it. Andrew. I understand.

Zhao Bo, so you probably mean that although our second quarter growth rate is 1-3%, but in fact, the products of customers and customer differences in the second quarter are actually very strong. Can you say that? Yes, we can say that.

Because we used to be very, very non-compliant, that is, many orders could not be received. Now, some orders do not need to be received. It automatically withdraws. But our production capacity is still 1% to 3%. We are non-compliant. We are still 100%.

我们现在看起来是不提供不同制成工艺的营收了。 我建议未来是否可以提供一个季度的 weighty average制成工艺节点的数字, 这样子我们也可以做一个简单的追踪。 我记得上一个季度,我们的工艺节点大概平均是98奈米, 就是用weighty average,用每一个节点乘以它营收的比重。 and then calculate the weighting average. Can you provide such data in the future?

Thank you. We are discussing this. Andrew, we have encountered a big problem, which is that our node is particularly difficult to calculate. At the last meeting, I also told everyone that China and the international community have done a lot of characteristic engineering. So we have some specialized, it's different from others. When we built the factory, it was at these specialized points to increase production capacity. So every season, every year, it's not the same. It's the same as other factories that are built according to the Moore's law. That's 40 nanometers, that's 40 nanometers. 28 nanometers is 28 nanometers. But our historical situation is that when others build 40 nanometers, we don't build a factory. 28 nanometers is also built later than others. So when we build a factory very late, it also has an advantage. That is, we bought 28 nanometers of equipment, but it may be 40 nanometers or 55 nanometers recently. In this way, we can make several nodes in a factory. We can switch according to the needs of the product. So every month, In fact, in the same factory, the ratio of 55nm, 40nm, 28nm, and 22nm is actually different. They are all cut. Then we have to say in a quarter how much is 28nm and how much is 40nm. In fact, this is not very clear. In addition, the 8-inch we have now established is also from 90nm to 0.18. This 12-inch is also from 22nm to 0.18. The overlap in the middle 28, 22 nanometers are also doing Wi-Fi. 14 nanometers are also doing Wi-Fi. What we emphasize more is the focus on the Wi-Fi market. Our central international technology, products, customers, what kind of competitive status is there? It's not necessarily about how many 40 nanometers we have done. We are doing BCD, Analog Power, is the same. We are doing 40 nanometers. 65nm, 90nm, 0.13nm, 0.18nm, etc. What we emphasize more is what kind of market share and what kind of technology storage is there in the power IC of SMIC. There is no need for everyone to differentiate between 0.40nm and 0.18nm. In fact, 0.18nm in BCD Analog Power is mainly used for high pressure and low power. Thank you.

Thank you for participating in today's conference call. Thank you for your trust and support. This concludes SMIC's first quarter webcast conference call. We thank you for joining us today. You may disconnect.