SMI Semiconductor Manufacturing International Corp. Adr

8” equivalent wafers

2Q18

1Q18

QoQ

2Q17

YoY

Wafer shipments

1,258,336

1,083,630

16.1%

1,014,158

24.1%

Utilization rate ^{( 1 )}

94.1%

88.3%

-

85.7%

-

Amounts in US$ thousands

2Q18

1Q18

QoQ

2Q17

YoY

Cost of sales

672,880

610,868

10.2%

557,061

20.8%

Depreciation

211,284

195,171

8.3%

171,814

23.0%

Other manufacturing costs

460,440

414,874

11.0%

384,033

19.9%

Share-based compensation

1,156

823

40.5%

1,214

-4.8%

Gross profit

217,833

220,176

-1.1%

194,132

12.2%

Gross margin

24.5%

26.5%

-

25.8%

-

▪

Cost of sales was $672.9 million in 2Q18, an increase of 10.2% QoQ from $610.9 million in 1Q18, mainly due to the increase in wafer shipment and product-mix change in 2Q18.

▪

Depreciation within the cost of sales increased by 8.3 % to $ 211.3 million in 2Q18, compared to $195.2 million in 1Q18.

▪

Other manufacturing costs within the cost of sales increased by 11.0 % to $ 460.4 million in 2Q18, compared to $414.9 million in 1Q18.

▪

Gross profit was totally $217.8 million in 2Q18, compared to $220.2 million in 1Q18. Excluding the recognition of the Licensing Revenue, gross profit was $165.0 million in 2Q18, compared to $112.6 million in 1Q18.

▪

Gross margin was 24.5% in 2Q18, compared to 26.5% in 1Q18. Excluding the recognition of the Licensing Revenue, gross margin was 19.7% in 2Q18, compared to 15.6% in 1Q18, primarily due to increased utilization and product-mix change in 2Q18.

▪

R&D expenses increased by $24.2 million QoQ to $147.2 million in 2Q18, compared to $123.0 million in 1Q18. Excluding the funding of R&D contracts from the government, R&D expenses increased by $22.1 million QoQ to $164.1 million in 2Q18. The change was mainly due to higher level of R&D activities in 2Q18. Funding of R&D contracts from the government was $19.0 million in 2Q18, compared to $16.9 million in 1Q18.

▪

Foreign exchange gains or losses were mainly due to the net impact of cash flow hedging and the depreciation of RMB against USD in 2Q18. Foreign monetary assets mainly consist of cash and cash equivalent and trade and other receivables in RMB. Foreign monetary liabilities mainly consist of borrowings, medium-term notes and trade and other payables in RMB.

▪

The change in other gains or losses, net was mainly due to the higher net gain arising from financial instruments at fair value through profit or loss.

Amounts in US$ thousands

2Q18

1Q18

QoQ

2Q17

YoY

Depreciation and amortization

267,528

268,516

-0.4%

241,045

11.0%

(1)

Cash and cash equivalent divided by total current liabilities.

(2)

Current assets excluding inventories divided by total current liabilities

(3)

Total current assets divided by total current liabilities.

(1)

Financial assets at fair value through profit or loss – current mainly contains financial products sold by bank.

(2)

Financial assets at amortised cost mainly contains bank deposits over 3 months.

(3)

Net debt is total debt minus cash and cash equivalent, financial assets at fair value through profit or loss and financial assets at amortised cost.

(4)

Total debt divided by equity.

(5)

Net debt divided by equity .

n

Capital expenditures were $558.7 million in 2Q18, compared to $322.2 million in 1Q18.

n

The planned 2018 capital expenditures for foundry operations are approximately $2.3 billion, of which approximately $1.3 billion are expected to be spent for the expansion of capacity in our majority-owned Beijing 300mm fab, Tianjin 200mm fab and Shanghai 300mm fab and approximately $0.4 billion is mainly expected to be used for R&D equipment.

n

The planned 2018 capital expenditures for non-foundry operations are approximately $136.7 million, mainly for the construction of employee’s living quarters.

●

Revision of the Existing Annual Caps for Continuing Connected Transactions in Relation to Framework Agreement (2018-07-25)

●

Change of Registered Office in the Cayman Islands (2018-07-25)

●

2017 Corporate Social responsibility Report  (2018-07-25)

●

Centralised Fund Management Agreement and Framework Agreement with Semiconductor Manufacturing South China Corporation (2018-07-13)

●

Notification of Board Meeting (2018-07-10)

●

Connected Transaction in Relation to the Subscription of the Oriented Debt Financing Instrument (2018-07-06)

●

List of Directors and Their Roles and Functions (2018-07-03)

●

Resignation of Vice Chairman and Non-executive Director (2018-07-03)

●

Poll Results of Extraordinary General Meeting Held on 22 June 2018 (2018-06-22)

●

List of Directors and Their Roles and Functions (2018-06-22)

●

(1)Poll Results of the Annual General Meeting Held on 22 June 2018 (2)Retirement of Independent Non-executive Directors and (3)Appointment of Independent Non-executive Directors, Chairman of Audit Committee, Member of Compensation Committee, Members of Nomination Committee and Member of Strategic Advisory Committee (2018-06-22)

●

6th Anniversary of "SMIC Liver Transplant Program" - Cumulative Donation Exceeding RMB 21 Million and Over 350 Children Saved (2018-06-12)

●

Closure of Register of Members (2018-06-01)

●

(1)Grant of Share Options and (2) Non-exempt Connected Transactions- Proposed Grant of Restricted Share Units to Directors (201 8-05-23)

●

Grant of Options (2018-05-23)

●

Circulars - Notification Letter and Request Form for Non-registered Shareholders (2018-05-21)

●

Notice of Extraordinary General Meeting (2018-05-21)

●

Notice of Annual General Meeting (2018-05-21)

●

Circulars - Notification Letter for Registered Shareholders (2018-05-21)

●

Circulars - (1) Non-exempt Connected Transactions the Datang Subscription and the China IC Fund Subscription and (2) Notice of Extraordinary General Meeting (2018-05-21)

●

Form of Proxy for Use at the Extraordinary General Meeting to be Held on 22 June 2018 (2018-05-21)

●

Form of Proxy for Use at the Annual General Meeting to be Held on 22 June 2018 (2018-05-21)

●

Circulars - (1) Re-election of Directors (2) Proposed General Mandate to Issue and Repurchase Shares and (3) Notice of Annual General Meeting (2018-05-21)

●

SMIC Reports Unaudited Results for the Three Months Ended March 31, 2018 (2018-05-09)

●

Connected Transaction in Relation to Entering Into Partnership Agreement for the Establishment of IPV Capital Global Technology Fund (2018-05-03)

●

Circulars - Notification Letter and Request Form for Non-registered Shareholders (2018-04-27)

●

Circulars - Notification Letter for Registered Shareholders (2018-04-27)

●

Circulars - Notification Letter and Change Request Form to Registered Holders (2018-04-27)

●

Circulars - Letter and Reply Form to New Registered Shareholders - Election of Means of Receipt and Language of Corporate Communication (2018-04-27)

●

2017 Annual Report  (2018-04-27)

●

Non-exempt Connected Transactions the Datang Subscription and the China IC Fund Subscription (2018-04-24)

●

Notification of Board Meeting (2018-04-12)

(1)

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

(2)

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

(3)

The new IFRS 9 standard, effective on January 1, 2018, addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. As the adoption of IFRS 9, the Group recognized the changes in value of available-for-sale instruments (“AFS”) through profit or loss and reclassified the opening balance of fair value of AFS from its reserve to retained earnings in 1Q18.

(4)

The new IFRS 15 standard, effective on January 1, 2018, 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. The Group has performed a detailed assessment on the impact of the adoption of IFRS 15 and decided to adopt a modified retrospective approach. The changes of the accounting policies have no significant impact on the Group’s Consolidated Statement of Profit or Loss.

(1)

As the adoption of IFRS 9 and IFRS 15, the comparative figure as of March 31, 2018 in the Condensed Consolidated Statement of Financial Position has been revised to conform the current period’s presentation.

(2)

On June 29 , 201 8 , pursuant to t he s hare s ubscription a greement between the Company , Datang Telecom Technology & Industry Holdings Co., Ltd. ( “ Datang ” ) and Datang Holdings (Hongkong) Investment Company Limited ( “ Datang HK ” ) , the Company allotted and issued 61,526,473 shares of the Company , representing approximately 1.23 % of the issued share capital of the Company as enlarged by the issue of the shares, at the price of HK$10.65 per share. The proceeds of the placing are approximately HK$ 655.3 m illion (approxim ately US$ 83.5 million) .

(3)

On June 29, 2018, pursuant to the perpetual subordinated convertible securities (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 shares of the Company.

(1)

As the adoption of IFRS 9 and IFRS 15, the comparative figure for the three months ended March 31, 2018 in the Condensed Consolidated Statement of Cash Flows has been revised to conform the current period’s presentation.

(2)

In 2Q18, the Group received a capital contribution of US$524.0 million into the capital of the subsidiary, Semiconductor Manufacturing South China Corporation, from non-controlling interests shareholders.

*

For id entification purposes only