indie Semiconductor, Inc.

Welcome to the 3rd Anniversary of ZTE 2022. Today's meeting will be live-streamed online and on the phone. Please note that if you join the meeting by phone, you will only be in the listening mode. After the presentation, we will conduct the Q&A session. Next, you will receive instructions on how to participate in the Q&A. Welcome to Semiconductor Manufacturing International Corporation's third quarter 2022 webcast conference call. Today's call will be simultaneously streamed through the internet and telephone. Please be advised that if you join the meeting by phone, your dial-ins are in listen-only mode. However, after the conclusion of the management's presentation, we will have a question and answer session. At this time, you will receive instructions on how to participate. Now I would like to welcome Vice President and Chairman of the Board, Ms. Guo Guangli. Without further ado, I would like to introduce this Guo Guangli Senior Vice President Board Secretary Host Webcast.

Hello, everyone. Welcome to the 3rd quarter of the 2022 International Center for Earnings. Today, the participants of the Earnings Show Greetings. Welcome to SMIC's third quarter 2022 webcast conference call. Attending today's call are Dr. Gao Yonggang, Chairman, Dr. Zhao Haijun, Co-Chef Executive Officer, and Dr. Wu Junfeng, Senior Vice President. At this point, I would like to remind everyone that today's statement, including the preliminary statement, is not a guarantee of the company's expectations for the future performance, but has a risk and uncertainty impact. Please take note of the preliminary statement in our performance announcement, unless there is another explanation. The data of the performance announcement will be presented according to the international financial report. All currency data

Let me remind you that today's presentation may contain forward-looking statements that do not guarantee future performance but represent the company's expectations and are subject to inherent risk and uncertainty. 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.

接下来,有请吴俊峰博士来介绍公司的财务情况。 I will now hand the call to Dr. 吴俊峰 to introduce the company's financial status. 首先,我向大家汇报2022年第三季度未经审核的财务业绩。

然後給出第四季度的指引及全年展望。 First, I will report our unaudited financial results for the third quarter, followed by our guidance for the fourth quarter and the full year.

34.7% interest rate is 38.9% interest rate is 0.5% interest rate is 5.8% interest rate is 4.78 billion dollars interest rate is 11.4% interest rate is 54.1% interest rate is 11.92 billion dollars interest rate is 2.3% The third quarter's financial results are as follows. Revenue was $1,907 million, up 0.2% sequentially and 34.7% year-over-year.

Growth margin was 38.9%, down 0.5% percentage points sequentially, and up 5.8 percentage points year over year. Profit from operations was $478 million, down 11.3%.

Sorry, we are back to the line. We can start now.

Profit from operations was $478 million, down 11.4% sequentially and up 54.1% year-over-year. EBITDA was $1,192 million, down 2.3% sequentially and up 33.3% year-over-year. Profit attributable to the company and non-controlling interest were $471 million and $104 million respectively.

As for asset debt, at the end of the third quarter, the company's total assets amounted to $4.18 billion, of which the deposit amounted to $1.84 billion. The total debt amounted to $1.39 billion, of which the net debt amounted to $80 billion. The total equity amounted to $2.79 billion. The total net debt equity ratio was 28.6%, and the net debt equity ratio was 37.4%.

Moving to the balance sheet, at the end of the third quarter, the company had total assets of $41.8 billion, of which total cash on hand was $18.4 billion. Total liabilities were $13.9 billion, of which total debt was $8 billion. Total equity was $27.9 billion. Total debt to equity was 28.6%. and net debt to equity was negative 37.4%. 关于现金流量,在三季度, 经营活动所得现金金额为收入10亿6千9百万美元, 投资活动所用现金金额为支出30亿2千4百万美元, 融资活动所得现金金额为收入10亿6千3百万美元。 In terms of cash flow, In the third quarter, we generated $1,069 million cash from operating activities. Net cash used in investing activity was $3,024 million. Net cash from financing activities was $1,063 million.

Above is the company's financial results for the third quarter.

For the fourth quarter and the full year, our guidance and outlooks are as follows. In the fourth quarter, revenue is expected to be down 13% to 15% sequentially, and growth margin is expected to be in the range of 30% to 32%. According to the results of the previous three quarters and midpoint of guidance for the fourth quarter, The company's full-year revenue is expected to be around $7.3 billion, up around 34% year-over-year, and the growth margin is expected to be around 38%. Our capital expenditure plan for this year is raised from $5 billion to $6.6 billion. Depreciation and amortization for the full year is expected to be approximately $2.3 billion. This concludes the financial status. Thank you.

Thank you, Dr. Wu. Next, I will hand the call to Dr. Zhao Haijun to comment on market, operations, and technology platforms. Hello, everyone.

And thank you for attending the third quarter earnings webcast.

The industrial division system and layout are undergoing profound adjustments. The existing industrial chain is interrupted or even blocked. The regionalization process is difficult to recommend. In terms of the industrial cycle, smart phones and consumer electronics are slow to be stored, and the number of clients is not strong. The industrial control field is relatively stable, but the growth is limited. The middle end of the car industry is strong in consumption, In the second half of 2022, from the perspective of macro environment, the soft consumer demand

Global energy crisis caused by international local conflicts, high inflation, currency fluctuation, et cetera, have led to weak global economic recovery. Overlapping with the new export control rules issued by the United States, these multiple factors have brought varying degrees of changes and challenges to the global and regional industry chain. The system and distribution for the division of industry are undergoing profound adjustments. The original circulation of global ecosystems has been interfered or even disrupted. And the process of regionalization is advancing with difficulties. From the perspective of the industry cycle, the stocking pace of smartphones and consumer electronics is low. customers' willingness to take part is not strong. The industrial controller's area is relatively stable, but with limited growth. The automotive area is resilient in terms of end consumption and demand still outstrips capacity in the industry. In such an environment, the company adheres to the tactics of dynamic adjustment of customers, products, and capacity. Although the performance was inevitably affected, the company achieved its target for the third quarter with the efforts of all employees.

North America and the U.S. share a total of 30% of the total revenue. According to the application, the total revenue for smart phones, smart homes, consumer electronics, and other categories is 26%, 15%, 23%, and 36%. Although the entire mobile phone industry is still in the storage, it is expected that the company will maintain direct communication with middle-end customers Since last year, we have adjusted the distribution of output in advance, and reduced the distribution of output in a relatively balanced segment area. Therefore, the smart phone income contribution has increased slightly compared to the 3G degree. The overall demand for consumer electronics is weak, and the income is down by 4%. Although the overall income of smart home appliances is down by 9%, the demand for local network applications is still strong, and the income has increased by 22%. Other categories have increased by 2%, among which industrial, electronic and automation have increased by 30%. The Internet has increased by 20% in terms of revenue under the promotion of portable devices. The net income is divided by 8 inches and 12 inches in terms of size. The ratio is 32% and 68% respectively. In general, the revenue size and structure of the third quarter are basically the same as that of the second quarter.

The third quarter's revenue was $1,907 million, with a slight decrease in shipment and a small increase in blended ASP due to product mix optimization. Therefore, the revenue remained flat comparing to the previous quarter. By geography, revenue from Chinese mainland and Hong Kong China accounted for 70%. North America, Europe, and Asia in total accounted for 30%. Waiver revenue by application, smartphone, smart home, consumer electronics, and others accounted for 26%, 15%, 23%, and 36% respectively. Although the overall mobile phone area was still destocking, thanks to the company's direct communication with end customers, we started to adjust capacity allocation in advance since last year, reducing the capacity plan in relative saturated segments. Thus, smartphones' revenue contribution increased slightly in the third quarter sequentially. The overall demand for consumer electronics was weak, with 4% sequential decrease in revenue in the third quarter. Overall revenue of smart home decreased by 9% sequentially. The demand for local area network application remained strong, with 22% increase in revenue sequentially. Revenue from others increased by 2% sequentially, among which power grid and automation increased by around 30% sequentially. Revenue from IoT increased by around 20% sequentially, driven by the wearable devices. By size, wafer revenue for 8-inch and 12-inch accounted for 32% and 68% respectively. Overall, the scale and structure of revenue in the third quarter was largely consistent with the second quarter.

Due to the decline in the external demand of some products, some of the internal factories in the company have also been taxed. At the same time, the total production volume of the current 8-inch box has also increased by 32,000 pieces, so the productivity rate has finally reached 92.1%, and it has dropped by 5% in the upper quarter. In addition to the above factors, the net profit rate of the upper quarter is 38.9%,

In the third quarter, externally, demand declined of some products, and internally, some fab conducted annual maintenance, while the monthly capacity increased by 32,000 alien equivalent wafers this quarter. Thus, the capacity utilization was 92.1%. down 5 percentage points from the previous quarter. Combining the above factors, growth margin for the third quarter was 38.9%, down 0.5 percentage points sequentially.

Our fourth quarter guidance is as follows.

Due to the weak demand in mobile phone and consumer, overlapping with the impact found that some customers need time to interpret the newly released U.S. export control rules. Revenue is expected to decline by 13% to 15% sequentially, with growth margin in the range of 30% to 32%. According to the results of the previous three quarters, and a midpoint of guidance for the fourth quarter. The company's full-year revenue is expected to be around $7.3 billion, up around 34% year-over-year, and growth margin is expected to be around 38%.

The company has always been cautious of rules, cautious of planning principles. According to the long-term demand of the market, long-term capital spending planning is carried out. Construction progress is possible according to the market situation. Purchase period long and short and other reasons to make appropriate adjustments. In the third quarter, the company announced the new project of Zhongxin Xixing. In the next five to seven years, Zhongxin Shenzhen, Zhongxin Beijing, In terms of capital expenditure,

we have 4.4 billion expenditure in the first three quarters and increased 85,000 8-inch equivalent monthly capacity. The company has always adhered to the consistent principle of prudent planning and conducts median and long-term capital expenditure planning according to the long-term market demand. The schedule may be adjusted appropriately according to the market conditions. procurement cycle time, and other reasons. Together with the new project of SMIC Seaching announced in the third quarter, SMIC has 12-inch new production line projects in Shenzhen, Jingcheng, Linggao, and Seaching for the next five to seven years, with total around 340,000 12-inch monthly capacity. Considering the long-term arrangements for these projects, the company needs to prepare for those equipments with long lead time in advance. Therefore, the capital expenditure plan this year is revised upwards from $5 billion to $6.6 billion.

Last time, we expected this round of weekly adjustment to last at least until the first half of next year. Combined with the current macroeconomic trend, and the tempo of storage, we have not seen any signs of recovery in the industry. Its impact has been from the middle of the market to the time of the supply industry. The supply industry is still in its early stages. In the face of the current complex environment and influence factors, combining the characteristics of the customer product structure, our technical platform for the company, product combination, production equipment, personnel configuration, processing, inspection and optimization, and improve production efficiency. At the same time, we are working on new and old products, and we are developing and supporting services, and we are preparing for the transformation of the production capacity, and we are opening up the production bottleneck, and we are accelerating the flow and output of the product. In addition, we are narrowing down the market strategy, and we are conducting market research and evaluation, and we are deepening customer service, and we are looking for opportunities to differentiate, and we are keeping the old customers in the center to do product delivery, and we are attracting new customers to come to the center to flow.

During the earnings call of previous quarter, we expected this cycle adjustment will last at least through the first half of next year. Based on the current macroeconomic trends and the pace of this stocking, we have yet to see signs of recovery in the industry. There is a time lag in the transmission of its impact, from the end market to the foundry industry. And the foundry industry cycle has not yet buttoned out. Facing the current complex environment and influencing factors based on the characteristics of our customers and product structure internally, we streamline, reveal, and optimize our technology platforms, product portfolio, capacity, and equipment mix. and staffing allocation to improve the efficiency of our production. Meanwhile, we prepare for the iteration of new and existing products in terms of research and development, supporting service and capacity, deep bottleneck production, and accelerate the tape out and output of iteration products. Externally, we refine our marketing tactics research and evaluation, deepening customer service, look for opportunities for differentiation, so as to retain existing customers to iterate products and attract new customers to take out in SMIC, reserving certain iteration time, gaining momentum, and waiting for the industry cycle to rebound. 除了行业周期因素以外,近期美国更新修订了出口管制规则,

In addition to the industry cycle factor,

the United States has recently updated and revised its export control rules for a new round of restrictions on China IC industry. According to our preliminary interpretation, the new rules have an adverse impact on our production and operation. We have maintained close communications with suppliers and customers, while the clarification of some definitions in the new rules and the assessment of impact on the company are still in progress.

Since the establishment of Zhongxin 22 years ago, it has gone through many ups and downs. It has also encountered many difficulties. Due to the multiple complex external factors that overlap this period, it may take a long time to adjust. The development of the company cannot be avoided when the industry is at its peak. When the industry is in trouble, it cannot be avoided by persistence and patience.

Since its establishment 22 years ago, SMIC has experienced the ups and downs of many cycles, as well as many difficulties. The adjustment may last longer as this cycle is overlaid with multiple complex external factors. The development of the companies is inseparable from seizing the momentum when the industry is booming, and even more inseparable from persistence and patience when the industry is going through a difficult time. In the face of a severe situation, we are still full of confidence in the company's medium to long-term development.

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

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. Zhao and Dr. Wu. 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. To ask a question, please press star 11 on your telephone. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.

Okay. Yes. Thank you. And, you know, appreciate the work you're doing managing through everything. The first question on the capital spending, two parts. First, if you could talk about the motivation to accelerate the prepayments given the slowdown in the industry, and if this is tied to areas like long lead time, tools like lithography. And then the second part is just with the pull-ins, what is the initial view on 2023 APEX? and your planned expansion for 8-inch and 12-inch with that spending.

Hi, Randy. Thank you for raising the first question. To answer your question, the first one, for the long delivery cycles of the equipment, they put the down payments there. That's the reason this year we raised the CAPEX from $5 billion to $6.6 billion. This kind of machine, not just for the long delivery to your machine lithography, but also include some tools and the supplier size is relatively small. They have the overwhelming orders. They take very long time to shape the machine. We have to put down payment there to secure the supply of this type of machines. Just now, I mentioned a number. For the next five to seven years, Altogether, we have five new projects to reach about 340,000 wafer per month 12-inch capacity. That's a very big scale, but the time also takes five to seven years to complete. We have to make sure that different five siting for different technologies to serve different customers, so they have different two types and to get in on the schedule, and to secure that part, we have to raise these capex for the down payments. Second thing you mentioned that for next year, what's roughly about these capex for 8-inch? As you know, we have the regular type of increments of 8-inch capacity major to satisfy the industry growth. Last year, 2021, we raised about 40,000 wafers per month for 8-inch. This year, we have the similar type of incremental capacity. Next year, I believe we have the similar type. For 8-inch, it's a mature industry, but they also have the growth there. They have the continuing growth from our customers and the Chinese market.

Okay, and actually for the CapEx, do you have the 12-inch expansion for this year and next year and your first view on CapEx for 2023?

Okay, for this year, really, we mentioned that more or less we have 40,000 wafers type of 8-inch, and the remaining is the 5 billion UDL 8-inch 40,000 wafers, that's the 12-inch. At the beginning of this year, we announced that the 12-year capacity increment is the same or higher than last year. And we haven't reached the final yet. And the fourth quarter, we'll have a lot of machine come in.

Okay. And any plan or rough view next year of similar amount or higher, lower?

Next year, And, you know, we announced the different projects sequentially. So, next year, the major five will be our Beijing New Wave 4.5, the new size, and the Shenzhen New Wave 4.5, a 12-inch, and 8-inch roughly the same size of this year for incremental capacity.

Okay. Just to clarify, is 12-inch roughly the same size And because the prepayment took up this year level, is the right baseline $5 billion, or it's more next year maybe similar, like $6.5 or $6.6 billion?

We haven't got the finalized schedule for the shipment yet. Basically, we hope that, you know, the V4.5, you set up that manufacturing facility, you will run it for 20 to more than 20 years. So that year is the downturn or the upturn. It's not that important for the specific five. And the important thing is, I might see around the five to be built up in different years. So next year, we just have this type of average growth for the next five to seven years. So next year, if everything unscheduled, I believe more likely have the similar growth of this year.

Okay, now that's helpful. And just a second question I wanted to ask about your sales outlook. So fourth quarter, if you could go through the different applications, because it looked like smartphone maybe, or just if you could go through the application. And then what type of utilization drop you're seeing into first quarter at this stage, if you see the rate of decline, similar pace or any moderation or stabilization?

Renli, very difficult to give you the exact number. I apologize for the interruption. Just now, we come to the point that we could not give the exact numbers of the finalized utilization, but we already include that factor into our revenue guidance and the gross margin. The job of gross margin mainly from the loss of the utilization and the facing of new depreciations. Just now, during our statement before the quarter, we gave one information that we are working very closely with our customers to clarify the impacts of the new guidelines from U.S. government. That part is also likely to be impacts, because some customers hesitate at this moment. We need to settle down exactly the way for loading, this type of thing. But lower than the third quarter, 92%, definitely.

Okay. Yen, have you quantified or about how much impact on the part where you're working with customers? Like just that part, because there's the demand impact, but is there kind of a part that's the impact of that?

We cannot get an exact number at this moment. but we just found that that impacts the international markets, not just to the whether or not technology things. The international market, like the computing things, their markets get a very, very big impact at this moment, and customers are very hesitant on the further inventory for their market. We do not know exactly what's the impact to the market. My personal guiding is maybe 30% of the overall market for this kind of motherboard and graphics type of thing. They cannot export it to China market, so they have this kind of back splash to the overseas market. When this kind of industry, they cut down the demands and some customers, even though they're not in the mature technologies, they also need to take cautions that they do not overbuild the inventory. And this kind of thing impacts, affects quite a many customers, even though they are major products selling overseas, not necessarily to the Chinese market.

Okay, great. Thanks a lot, Dr. Zhao, and good luck.

Okay, thanks, Rene.

Thank you for your questions. Now, our first question is from Wang Ziyuan from Citic Securities. Wang Ziyuan, please ask a question.

Hello, everyone. I'm Wang Ziyuan, a semiconductor analyst at Central Securities. I have two questions. The first one is about capital spending and expansion. I would like to ask whether the $5 billion in capital in the previous year includes the investment in the gold industry, and whether there is an increase in the amount of gold this time. In addition, can we look forward to the expansion rhythm of next year? In which quarter will it focus on the delivery of these devices, including the fall of the wafer out and our income? What time will it be? Thank you.

Hello, Ziyuan. Thank you for the question. First of all, the increase in KPACs this time and the original $51 billion KPACs basically do not include the construction of Tianjin's new factory, or the future. Only a part of the initial funding is available. The rest is not included in the increase. In terms of growth, we have Shenzhen's 12-year-old, Beijing and Beijing's 12-year-old, Lin Gang, Shanghai Lin Gang, and Xi Qing in the future. But now the long-term equipment is mainly for the previous three projects. Tianjin's business plan and equipment purchase, we are still in the planning. So this does not include the part of Tianjin. Then your second question is to ask, since there is such a development in the long term, How will the speed of the expansion of production be reflected in the next year? What we see now is that the long delivery period on the international supply chain is tense, and there is no relaxation. The P.O. or monthly payment that we now send out is actually a very long delivery period. What was originally set was also to enter the factory irregularly, so the executive production capacity is not able to form at once. Some of the extra equipment has been delivered for a long time, but a few of them have not been delivered yet. This is why the central international management level needs to pay for long-term orders. Because only in this way can we arrange the delivery time according to our plan, rather than having it sooner or later and not being able to control it. So in the next year, our general feeling is that it will not be explosive. It will be delivered in a blink of an eye. Almost every quarter will be too much. I understand. Thank you, Mr. Hai. I would like to ask, how long has the delivery period of these devices reached? And can I understand

This renovation is actually considered through the board. A production plan of 34,000 pieces.

Okay, Ziyuan, let's answer the second question first. We are still conservative and cautious in the whole plan. We just put the necessary part. For example, you want to build a production of 100,000 pieces. Maybe you want to order 30,000 pieces first. We will not overdo it at once. To do too much, but to ensure that our plan has a certain insurance system. That's what you asked just now. How much is there for the future plan? We only increased the down payment of $1.5 billion. Compared with our big future plan. In fact, this is still a small part. But just now I also said that its biggest insurance is that I can guarantee the front. The first step is to guarantee the first 30,000 pieces. Then this is definitely possible. The second 30,000 pieces are behind the first 30,000 pieces. It's no problem if it's a little longer. What I'm afraid of is that the first 30,000 pieces are half-pulled, and the second one is also half-pulled. Then the impact will continue forever. So our insurance system is mainly based on this approach. The second question you just asked is... In the question you just asked... The second question is...

Second, how long is the delivery time of our equipment?

There are two situations for a company that has a long delivery time. One is that it is mandatory. For example, the light machine. Although its company is very large, its stock is very long. If it is fully operational now, the original stock is already ordered. You set another one and they have to give you another one. This cycle is very long. It's almost a year and a half to two years. The second one is that some companies don't need it much, but the company is very small, and a few orders have been added. You will be pushed to a very long time. For example, some companies may have only 30 total production units a year. If there is a sudden increase of 10, you have to wait another half year, right? So something like this is also I understand. Thank you, Mr. Han. And the second question is, I would like to know if we can share with you the situation of the reserve in Ren Tai. Thank you. Last question. Yes, I think everyone has this consideration, that is to say, we increase the scale on the one hand, so many different factories, we need a large number of engineers and managers to manage them well. The second is that we are now increasing production. In fact, the increase in the market itself is only part of it, and more of it is what China and the international community want to do and have not done before. If this is the case, This is the integrity of each product type. We all need to do a lot of research and development work with customers in the early stages. So we need these two types of personnel. I can tell you that this year's talent reserve and development are very good. One is that this year, maybe because of the epidemic, the degree of resignation has been greatly reduced and has entered a history of the best level. The second is that the students who graduated this year, whether they are university students or researchers, are very important to the semiconductor industry. So we have a large number of excellent talents to sign up to participate in Central International. We found that the students are very good this year. The staff quality is very good. We also recruited a large number of people to come in. The number of people in Central International was probably 15,000 to 16,000 last year. This year, it has exceeded 20,000.

I understand. Thank you, Mr. Haijin. Thank you. Okay.

Thank you, Ziyuan. Thank you.

Next question is from Li Xue Lai from CICC. Please ask a question.

Okay, thank you, thank you, management. I'm Li Xuelai, a translator from the central company. I have two questions here. The first question is about the accuracy of the entire industry. As we mentioned earlier, because of the external factors this time, the impact factors will be more. This time, the down cycle may be longer. Then I still want to ask the management level, that is, this time we are going down the cycle. That is, if it is predicted now, when will it come to an end? After that, when the next cycle comes up, then which areas of the downstream will be able to drive the entire industry to rise? Thank you. This is the first question.

Okay, thank you, Xue Lai. Now let's talk about what you just asked. We are not fortune tellers. But I can share my thoughts and feelings with you. Now we are talking about the industry cycle. In fact, what we see in this round is the cycle of the entire economy. It is not made up of the semiconductor industry. Because our industry, for example, optical, fiber, these materials or equipment, in the past year or more, they have not been delivered quickly. If you look at the central international market, I have always thought that this year's growth is similar to that of last year. Last year was similar to the previous year. So we didn't see that much growth. What we see now is that in the last quarter, I was talking about a rapid stop. That is to say, in the application scenario of the overall economic points, its demand dropped suddenly. Before our central international meeting, Maybe your central company and all of you have already participated in many other conferences of our customers or whole machine manufacturers. During their conference, you will get a very accurate number. That is, in the Chinese market, mobile sales, home appliances sales, panel sales, industrial sales, you will see its value and inventory. Then you will immediately get a conclusion, that is, it is not that the industry produces more, but the demand is much slower than the original speed. It turns out that we say that the speed of some segment markets, for example, mobile phones, it may be that the unit sales dropped by more than 30%. Then it suddenly appeared that the original inventory has become higher. When will it come back? When the entire economy becomes better, it will come back. Now customers don't dare to carry too much because now they carry too much of their own limited funds and are also worried that they will be stored at a very high price. If you don't need it, you have to lower the price to sell it. There is nothing you can do about it. Another one is to worry that now the storage is all old products. If a new product comes out, our products will not be able to be sold. Because we are now in the high-end electronics industry. For example, mobile phones, home appliances, smart terminal, and so on. These are very fast. If you have 18 months of storage, I'm sorry. Many of your products may not be needed after 18 months. Everyone has such a worry. Only by increasing the consumption, we dare to prepare new products and future storage. So we have an old saying in China, maybe it's an Indian saying, that is, the spirit of the spirit is the spirit of the spirit. It is our industry that now sees where its cause comes from and where it has to be solved. So we are now looking forward to the whole economy to be able to come back. Then I will also share with you the things I observed in the past few rounds. For example, look at it with your phone. Many times, everyone thinks that this industry is not only seasonal every year, the first quarter is bad, the second quarter is good, and so on. In a few years, they also find that they can't do it, so they have to change the industry. But after a few seasons, it suddenly gets better. So we are also dealing with a general consumption, the emergence of this new function, and the trend of the whole society. So we just said that We need at least 20 years to build a factory. It's not because this year is a small semiconductor year that we won't do it. It's not because it's a big year that we'll do three together. We still follow the steps of SMIC. We follow the pace of our current customer development and technology development to expand our production capacity. As I said before, SMIC has only 6% of the market share in the entire manufacturing industry. If we increase or decrease a little, it will not affect the supply and demand relationship of the entire industry. The entire manufacturing industry only accounts for about 20% of the semiconductor industry, so if the manufacturing industry increases a little, it will not cause the entire semiconductor industry to suffer quickly or not. Therefore, the entire social economy's demand for the entire semiconductor industry is large or small. The demand of the entire industry has decreased by 30%, It has nothing to do with us building faster or slower. That's all I have to say.

I see. Thank you, Dr. Zhao. As you said, mobile phones, PCs, and consumer electronics are indeed very weak. At the same time, we can see that the demand for new energy vehicles or new energy fields is relatively low. The market is also considering this issue, that is, if the next cycle is up, is it necessary to rely on mobile phones and PCs to take the lead in this regard? Is it a recovery? At the same time, there are some new applications, and there is some rapid growth. I don't know if you agree with this point of view.

Well, Xu Lan, if we take Central International as a small company, then you are right. That is, we are specializing in a certain increase in the market. In the automotive industry, the chips and separators used in the automotive industry are relatively small in terms of the entire order in the manufacturing industry. It should be less than 10%. Good companies are close to 10%. Only 5% are missing. So, by using this increase to do the entire expansion and production scale, I don't think we can do much. Unless there are some companies that specialize in this field, this is okay. For example, some companies have more than 100,000 products to serve this industry. Maybe it's okay. I think when the next round comes back, it should still be the most popular demand. Because once it takes advantage of the capacity, the rest of the things are easy to do. The mobile industry, the original entire demand for IC is half of the industry. Now less than half is almost such a figure. If this largest piece is reduced by one-third, there is no other industry, the car industry you mentioned just now, or others, can make up for this piece. It will definitely show that this capacity is insufficient. It must be like this. Now, in addition to mobile phones, as everyone knows, civil-use home appliances, wearables, and so on, are there any new places? There are new places. We see the power storage, AC, and power supply. This is also a new amount. No matter how big the percentage is, at least from the original to the existing, this is also a competitive amount. And the quality requirements are extremely high. It takes a lot of effort to cooperate with middle-end users to meet the requirements of this market.

Okay, thank you, Dr. Zhao. I have a second question. It's about the company's profitability. I see that the profit and loss rate for the four seasons is still relatively low. I wonder if there are a few factors related to the demand for the productivity rate. In addition, is price change also an important factor? Is there any fluctuation in terms of price? Thank you. Well,

There are two main reasons for the fourth quarter. One is the decline in productivity. We discussed that it will be lower than 92% in the future. We haven't decided on the exact number yet. The second reason is that there is a drop in the supply of new production. Some of the new production is being used and some is not. So, the net profit has dropped. These are the two most important factors. That price must be the market. There is a direction, but it is not the same. First of all, there is a fluctuating share market. In fact, the share market is not very related to each other. You can't say that this market orders less equipment. All got to make another product. Its needs are not the same. Then we see this storage market. This is not a big center. But we also have this storage market. It's changing very fast. The supply and demand is very high. And then the market of panel drive, from a very large TV to a very small folding screen, it's changing very fast. The storage is very high. The demand for everyone to order is decreasing very fast. I see these two are the first saturated markets. And now the price has also changed very much. Other markets have not changed significantly yet. Thank you.

The next question is from Zihou from China Renaissance. Please ask a question. Hello. Please ask a question.

Is it me?

Yes. It's you, Zihou.

Good morning, Haijun. I have two questions for you. First, in terms of production capacity, we have a large production capacity in the next few years, 340,000 pieces of production capacity. How do overseas and domestic customers distribute it in terms of new production capacity? And how do you distribute it from the application level? Okay, finally, thank you for this question.

What you just said is actually two things. One is what do we do with our production capacity? The second is how do we divide it into domestic, foreign, or different distribution? In terms of the division between China and the international market, according to our report, about 70% is related to the Chinese market, and about 30% is overseas. The first answer is that the proportion is roughly the same. Secondly, we also look at where the increase in the international market is. There is no question of division in this market. In order to achieve our growth, we will now discuss with our customers that we think we can do well in this market. Then we will meet the capacity of the market in this market. We will see so much. This will not be strictly divided according to the area. This is to answer your question. It has always been like this in the 70s and 30s. It may limit the growth of the central international future. So we are not completely considering this. You also know the name of Zhongxing International is Zhongxing International. We are also developing our industry. The second is that since everyone builds factories in different places, do they do the same thing or do they do different things? The answer is this. My current idea is that at least one-third of them should be the same and be used. In this way, it can satisfy the dynamic increase and decrease of customers. One factory can't do it, so another factory can do it. But any factory has to have about two-thirds. There should be a specific distribution market and technology to deal with these. Because it has to do everything. I also said in the explanation meeting that its equipment This flexibility is very strong. Each factory has to do several nodes. This is more complicated when buying equipment. There should be no mistake that only one factory does this. All of them are done in one Beijing factory. But now SMIC has built five new factories. In five new factories, not every factory does such a complicated thing. So I hope there are about two-thirds to do other things. For example, some factories are facing the Chinese panel industry. The ICs and applications it needs include, some of them are specifically for analog power, some of them are specifically for specialty memory, some of them are specifically for CMOS image sensor, and so on. They have their own weight. When you buy a machine like this, you won't buy too much. For example, the specialty memory and CMOS image sensor that I just mentioned, it uses very little metal layer. If you want to do MCU or do logic circuit, Right. Right. Right. Right. Right. It's for the needs of the Chinese desktop industry. Right. I understand.

The next question is, how is the tap-out status of our overseas customers in our company? Now, it's very good.

Because in China, last year and this year, we suddenly found that when the production capacity was not met, many industries were stopped. So they all have such a wish, that is, whether this product is designed by a Chinese company or a foreign company, it should have a considerable proportion of production in China's factory. Because they have a certain strategic alliance with China, we can have a long-term commitment to it in terms of production distribution. This trend has led to many foreign companies, which were originally produced at home by IBM, or were produced abroad, to bring a certain amount to China. China is now moving very quickly in this regard. The main impact of the new regulations in the US is the production of US customers and US design companies in China. Our understanding is that the production capacity we have now and the technical nodes we are working on They are all completely in line with these regulations. There is no impact. But in the previous report, we also said that we are discussing with the client so that the client can figure out this matter. Long-term cooperation has been set.

I understand. But what kind of products will the American client use in the future?

Thank you all for your questions.

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