SMIC Reports 2009 First Quarter Results

Investors should consider the information contained in SMIC's filings with the U.S. Securities and Exchange Commission (SEC), including its annual report on 20-F, as amended, filed with the SEC on November 28, 2008, especially in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections, and such other documents that SMIC may file with the SEC or SEHK from time to time, including on Form 6-K. Other unknown or unpredictable factors also could have material adverse effects on SMIC's future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this press release may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this press release. Except as required by law, SMIC undertakes no obligation and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Material Litigation

Recent TSMC Legal Developments:

On August 25, 2006, TSMC filed a lawsuit against the Company and certain subsidiaries, namely SMIC (Shanghai), SMIC (Beijing) and SMIC (Americas) in the Superior Court of the State of California, County of Alameda for alleged breach of a 2005 Settlement Agreement, alleged breach of promissory notes and alleged trade secret misappropriation by the Company. TSMC seeks, among other things, damages, injunctive relief, attorneys' fees, and the acceleration of the remaining payments outstanding under the Settlement Agreement.

In the present litigation, TSMC alleges that the Company has incorporated TSMC trade secrets in the manufacture of the Company's 0.13 micron or smaller process products. TSMC further alleges that as a result of this claimed breach, TSMC's patent license is terminated and the covenant not to sue set forth in the 2005 Settlement Agreement no longer in effect with respect to the Company's larger process products. The Company has vigorously denied all allegations of misappropriation. The Court has made no finding that TSMC's claims are valid.

On September 13, 2006, the Company announced that in addition to filing a response strongly denying the allegations of TSMC in the United States lawsuit, it filed on September 12, 2006, a cross-complaint against TSMC seeking, among other things, damages for TSMC's breach of contract and breach of implied covenant of good faith and fair dealing.

On November 16, 2006, the High Court in Beijing, the People's Republic of China, accepted the filing of a complaint by the Company and its wholly-owned subsidiaries, namely, SMIC (Shanghai) and SMIC (Beijing), regarding the unfair competition arising from the breach of bona fide (i.e. integrity, good faith) principle and commercial defamation by TSMC ("PRC Complaint"). In the PRC Complaint, the Company is seeking, among other things, an injunction to stop TSMC's infringing acts, public apology from TSMC to the Company and compensation from TSMC to the Company, including profits gained by TSMC from their infringing acts.

On August 14, 2007, the Company filed an amended cross-complaint against TSMC seeking, among other things, damages for TSMC's breach of contract and breach of patent license agreement. TSMC thereafter denied the allegations of the Company's amended cross-complaint and subsequently filed additional claims that the Company breached the Settlement Agreement by filing an action in the Beijing High Court. The Company has denied these additional claims by TSMC.

On August 15-17, 2007, the California Court held a preliminary injunction hearing on TSMC's motion to enjoin use of certain process recipes in certain of the Company's 0.13 micron logic process flows.

On September 7, 2007, the Court denied TSMC's preliminary injunction motion, thereby leaving unaffected the Company's development and sales. However, the court required the Company to provide 10 days' advance notice to TSMC if the Company plans to disclose logic technology to non-SMIC entities under certain circumstances, to allow TSMC to object to the planned disclosure.

In May 2008, TSMC filed a motion in the California Court for summary adjudication against the Company on several of the Company's cross claims. The Company opposed the motion and on August 6, 2008, the Court granted in part and denied in part TSMC's motion.

On June 23, 2008, the Company filed in the California court a cross-complaint against TSMC seeking, among other things, damages for TSMC's unlawful misappropriation of trade secrets from SMIC to improve its competitive position against SMIC.

On July 10, 2008, the California Court held a preliminary injunction hearing on TSMC's motion to enjoin disclosure of information on certain process recipes in the Company's 0.30 micron logic process flows to 3rd parties. On August 8, 2008, the Court granted-in-part TSMC's motion and preliminarily enjoined SMIC from disclosing fourteen 0.30um process steps. On October 3, 2008, SMIC filed a notice of appeal of the Court's August 8, 2008 Order with the California Court of Appeal. This appeal is currently pending.

During the pre-trial proceedings in the matter, questions arose regarding the actual terms of the 2005 Settlement Agreement between SMIC and TSMC. Accordingly, the California Court held a preliminary trial on January 13 to 16, 2009, limited to a determination of the terms of the Settlement Agreement and an interpretation of any requirements to "meet and confer" prior to institution of litigation. On March 10, 2009, the Court issued a Statement of Decision finding, in part, that an agreement between the parties was executed on January 30, 2005, and thereafter amended on February 2, 2005, as urged by TSMC. The Court's ruling may be appealed by SMIC following the filing of a final judgement by the Court in this matter.

The California Court has scheduled a trial upon all liability issues related to a selected list of TSMC trade secret claims and SMIC trade secret claims to commence on September 8, 2009.

In the Company's action in the Beijing High People's Court, following an unsuccessful challenge to that Court's jurisdiction by TSMC, the Court has held evidentiary hearings on October 15, October 29, and November 25, 2008. There are no further hearings scheduled by that Court and it is expected that the Court will issue a ruling based on the evidence presented to it.

Under the provisions of SFAS 144, the Company is required to make a determination as to whether or not this pending litigation represents an event that requires a further analysis of whether the patent license portfolio has been impaired. We believe that the lawsuit is at a discovery stage and we are still evaluating whether or not the litigation represents such an event. The Company expects further information to become available to us, which will aid us in making a determination. The outcome of any impairment analysis performed under SFAS 144 might result in a material impact to our financial position and results of operations. Because the case is in its discovery stage, the Company is unable to evaluate the likelihood of an unfavourable outcome or to estimate the amount or range of potential loss.



               Summary of First Quarter 2009 Operating Results

    Amounts in US$ thousands, except for EPS and operating data

                                  1Q09      4Q08      QoQ    1Q08(3)     YoY
    Revenue                     146,519   272,479   -46.2%   362,369   -59.6%
    Cost of sales               275,900   347,114   -20.5%   394,940   -30.1%
    Gross loss                 (129,381)  (74,635)   73.4%   (32,571)  297.2%
    Operating expenses           46,681     46,445          0.5%      170,151      -72.6%
        Loss  from  operations              (176,062)  (121,080)      45.4%    (202,722)    -13.2%
        Other  expenses,  net                    (4,480)      (4,146)        8.1%        (3,596)      24.6%
        Income  tax  (expenses)
          credit                                              3,305            (745)            --      (19,142)            --
        Net  loss  after  income
          taxes                                          (177,237)  (125,972)      40.7%    (225,460)    -21.4%
        Loss  from  equity
          investment                                        (874)            (92)    850.0%            (241)    262.7%

        Net  loss                                      (178,111)  (126,064)      41.3%    (225,701)    -21.1%

        Accretion  of  interest  to
          non-controlling  interest
          holder                                                (259)    (13,394)    -98.1%              846              --

        Loss  attributable  to
          holders  of  ordinary
          shares                                        (178,370)  (139,458)      27.9%      (224,855)  (20.7%)

        Gross  margin                                  -88.3%        -27.4%                              -9.0%
        Operating  margin                        -120.2%        -44.4%                            -55.9%

        Net  loss  per  ordinary
          share  -  basic  (1)                        (0.01)        (0.01)                            (0.01)
        Net  loss  per  ADS  -  basic            (0.40)        (0.37)                            (0.61)
        Net  loss  per  ordinary
          share  -  diluted  (1)                    (0.01)        (0.01)                            (0.01)
        Net  loss  per  ADS  -  diluted        (0.40)        (0.37)                            (0.61)


        Wafers  shipped  (in  8"
          wafers)(2)                                  168,682      323,175      (47.8%)      454,259    (62.9%)



        Capacity  utilization                    34.9%          67.7%                              92.1%

        Note:
        (1)  Based  on  weighted  average  ordinary  shares  of  22,344  million  (basic)
                and  22,344  million  (diluted)  in  1Q09,  18,948  million  (basic)  and
                18,948  million  (diluted)  in  4Q08  and  18,579  million  (basic)  and  18,579
                million  (diluted)  in  1Q08
        (2)  Including  copper  interconnects
        (3)  As  restated  in  "SMIC  Reports  2008  Second  Quarter  Results"  issued  on
                July  28,  2008

        --  Revenue  decreased  to  $146.5  million  in  1Q09,  down  46.2%  QoQ  from  $272.5
              million  in  4Q08  and  down  59.6%  YoY  from  $362.4  million  in  1Q08  due  to
              lower  wafer  shipments.
        --  Cost  of  sales  decreased  to  $275.9  million  in  1Q09,  down  20.5%  QoQ  from
              $347.1  million  in  4Q08,  primarily  due  to  a  decrease  in  wafer  shipments.
        --  Gross  loss  increased  to  $129.4  million  in  1Q09,  up  73.4%  QoQ  from  $74.6
              million  in  4Q08  and  up  297.2%  YoY  from  $32.6  million  in  1Q08.
        --  Gross  margins  decreased  to  -88.3%  in  1Q09  from  -27.4%  in  4Q08  primarily
              due  to  a  significant  decrease  in  wafer  shipments  as  well  as  fab
              utilization  QoQ.
        --  Total  operating  expenses  increased  to  $46.7  million  in  1Q09  from  $46.4
              million,  an  increase  of  0.5%  QoQ  primarily  due  to  a  decrease  in
              government  R&D  subsidies  received  in  1Q09.  Excluding  foreign  exchange
              gain,  total  operating  expenses  in  1Q09  was  $52.6  million  as  compared  to
              the  1Q09  guidance  of  $53  million  to  $56  million.
        --  R&D  expenses  increased  to  $18.5  million  in  1Q09,  up  47.7%  QoQ  from
              $12.5  million  due  to  a  decrease  in  government  subsidies  received  in
              1Q09.  Excluding  the  government  subsidies,  R&D  expenses  decreased  by
              6.2%  due  primarily  to  a  decrease  in  engineer  experiment  related
              expenses.
        --  G&A  expenses  decreased  to  $14.9  million  in  1Q09  from  $16.1  million  in
              4Q08  primarily  due  to  an  increase  in  the  foreign  exchange  gain  related
              to  operating  activities,  from  $2.1  million  in  4Q08  to  $5.9  million  in
              1Q09.
        --  Selling  &  marketing  expenses  decreased  to  $4.2  million  in  1Q09,  down
              28.0%  QoQ  from  $5.8  million  in  4Q08.



        Analysis  of  Revenues

        Sales  Analysis
        By  Application                                                              1Q09              4Q08              1Q08
        Computer                                                                            4.2%              4.5%            12.8%
        Communications                                                              50.9%            45.9%            54.3%
        Consumer                                                                          32.9%            37.5%            25.9%
        Others                                                                              12.0%            12.1%              7.0%

        By  Service  Type                                                              1Q09              4Q08              1Q08
        Logic  (1)                                                                        85.3%            85.6%            78.4%
        DRAM                                                                                    2.8%              2.6%            12.1%
        Management  Services                                                      4.1%              2.2%              2.5%
        Mask  Making,  testing,  others                                    7.8%              9.6%              7.0%

        By  Customer  Type                                                            1Q09              4Q08              1Q08
        Fabless  semiconductor  companies                            70.9%            65.0%            54.4%
        Integrated  device  manufacturers  (IDM)                11.4%            15.2%            31.6%
        System  companies  and  others                                    17.7%            19.8%            14.0%

        By  Geography                                                                    1Q09              4Q08              1Q08
        North  America                                                                60.4%            59.9%            53.6%
        Greater  China  (2)                                                        32.3%            33.6%            27.7%
        Asia  Pacific  (3)                                                            5.2%              4.1%              6.1%
        Europe                                                                                2.1%              2.4%            12.6%

        Wafer  Revenue  Analysis
        By  Technology                                                                  1Q09              4Q08              1Q08
        0.065um                                                                              0.1%                  --                --
        0.09um                                                                                8.1%            11.1%            19.8%
        0.13um                                                                              30.8%            34.4%            25.0%
        0.15um                                                                                0.8%              2.2%              4.2%
        0.18um                                                                              31.5%            32.5%            32.1%
        0.25um                                                                                0.4%              0.6%              0.5%
        0.35um                                                                              28.3%            19.2%            18.4%

        Note:
        (1)  Including  0.13mm  copper  interconnects
        (2)  Includes  Hong  Kong  and  Taiwan
        (3)  Excluding  Greater  China



        Capacity*

        Fab  /  (Wafer  Size)                                                                          1Q09                  4Q08
        Shanghai  Mega  Fab  (8")(1)                                                        85,000              88,000
        Beijing  Mega  Fab  (12")(2)                                                        33,750              40,500
        Tianjin  Fab  (8")                                                                          32,000              32,000
        Total  monthly  wafer  fabrication  capacity                        150,750            160,500

        Note:
        *  Wafers  per  month  at  the  end  of  the  period  in  8"  wafers
        (1)  Shanghai  Mega  Fab  is  now  comprised  of  Fab  1,  Fab  2,  and  Fab  3
        (2)  Beijing  Mega  Fab  is  now  comprised  of  Fab  4,  Fab  5,  and  Fab  6

        --  The  change  in  capacity  is  due  primarily  to  a  change  in  product  mix.



        Shipment  and  Utilization

        8"  equivalent  wafers                                                  1Q09              4Q08              1Q08
        Wafer  shipments  including  copper
          interconnects                                                          168,682        323,175        454,259

        Utilization  rate  (1)                                                  34.9%            67.7%            92.1%

        Note:
        (1)  Capacity  utilization  based  on  total  wafer  out  divided  by  estimated
                capacity

        --  Wafer  shipments  decreased  47.8%  QoQ  to  168,682  units  of  8-inch
              equivalent  wafers  in  1Q09  from  323,175  units  of  8-inch  equivalent
              wafers  in  4Q08,  and  down  62.9%  YoY  from  454,259  8-inch  equivalent
              wafers  in  1Q08.



        Detailed  Financial  Analysis

        Gross  Profit  Analysis

        Amounts  in  US$  thousands                1Q09          4Q08            QoQ          1Q08            YoY
        Cost  of  sales                                275,900    347,114      -20.5%    394,940      -30.1%
              Depreciation                            130,375    183,916      -29.1%    159,715      -18.4%
              Other  manufacturing  costs  138,791    156,446      -11.3%    227,731      -39.1%
              Deferred  cost  amortization    5,886        5,886              --        5,886              --
              Share-based  compensation            848            866        -2.1%        1,608      -47.3%
        Gross  Profit                                (129,381)  (74,636)      73.3%    (32,571)    297.2%
        Gross  Margin                                    -88.3%      -27.4%                          -9.0%

        --  Cost  of  sales  decreased  to  $275.9  million  in  1Q09,  down  20.5%  QoQ  from
              $347.1  million  in  4Q08,  primarily  due  to  a  decrease  in  wafer  shipments.
        --  Gross  loss  increased  to  $129.4  million  in  1Q09,  up  73.4%  QoQ  from  $74.6
              million  in  4Q08  and  up  297.2%  YoY  from  $32.6  million  in  1Q08.
        --  Gross  margins  decreased  to  -88.3%  in  1Q09  from  -27.4%  in  4Q08  primarily
              due  to  a  significant  decrease  in  wafer  shipments  as  well  as  fab
              utilization  QoQ.



        Operating  Expense  Analysis

        Amounts  in  US$  thousands                          1Q09      4Q08          QoQ        1Q08          YoY

        Total  operating  expenses                      46,681  46,445        0.5%  170,151      -72.6%
            Research  and  development                  18,494  12,524      47.7%    34,233      -46.0%
            General  and  administrative              14,928  16,146      -7.5%    18,606      -19.8%
            Selling  and  marketing                          4,208    5,843    -28.0%      4,884      -13.8%
            Amortization  of  intangible
              assets                                                      9,031  11,564    -21.9%      6,784        33.1%
            Impairment  loss  of  long-lived
              assets                                                            --        967            --  105,774              --
            Loss  (Income)  from  disposal  of
              properties                                                    20      (599)          --        (130)            --

        --  Total  operating  expenses  increased  to  $46.7  million  in  1Q09  from  $46.4
              million,  an  increase  of  0.5%  QoQ  primarily  due  to  a  decrease  in
              government  R&D  subsidies  received  in  1Q09.  Excluding  foreign  exchange
              gain,  total  operating  expenses  in  1Q09  was  $52.6  million  as  compared  to
              1Q09  guidance  of  $53  million  to  $56  million.
        --  R&D  expenses  increased  to  $18.5  million  in  1Q09,  up  47.7%  from  $12.5
              million  due  to  a  decrease  in  government  subsidies  received  in  1Q09.
              Excluding  the  government  subsidies,  R&D  expenses  decreased  by  6.2%  due
              primarily  to  a  decrease  in  engineer  experiment  related  expenses.
        --  G&A  expenses  decreased  to  $14.9  million  in  1Q09  from  $16.1  million  in
              4Q08  primarily  due  to  an  increase  in  the  foreign  exchange  gain  related
              to  operating  activities,  from  $2.1  million  in  4Q08  to  $5.9  million  in
              1Q09.
        --  Selling  &  marketing  expenses  decreased  to  $4.2  million  in  1Q09,  down
              28.0%  QoQ  from  $5.8  million  in  4Q08.



        Other  Income  (Expenses)

        Amounts  in  US$  thousands                  1Q09        4Q08              QoQ          1Q08          YoY
        Other  income  (expenses)                (4,480)  (4,146)          8.1%      (3,596)      24.6%
            Interest  income                                  436      1,184        -63.2%        3,758      -88.4%
            Interest  expense                          (5,498)  (7,133)      -22.9%    (17,267)    -68.2%
            Foreign  currency  exchange
              gain  (loss)                                      (357)  (2,543)      -86.0%      10,317              --
            Other,  net                                            939      4,346        -78.4%          (404)            --

        --  Interest  income  declined  in  1Q09  due  to  significantly  lower  bank
              deposit  rate.
        --  Overall  interest  expense  decreased  to  $5.5  million  in  1Q09  from  $7.1
              million  in  4Q08  primarily  due  to  a  lower  average  loan  balance  and  lower
              interest  rates;  however,  the  effect  was  partially  offset  by  lower
              government  interest  subsidies  received  in  1Q09.
        --  Foreign  exchange  loss  arising  from  non-operating  activities  decreased
              to  $0.4  million  in  1Q09  from  $2.5  million  in  4Q08.    Combined  with  the
              foreign  exchange  gain  arising  from  operating  activities,  the  Company
              recorded  an  overall  foreign  exchange  gain  of  $5.5  million  in  1Q09  as
              compared  to  a  foreign  exchange  loss  of  $0.4  million  in  4Q08.
        --  Other,  net  decreased  to  $0.9  million  in  1Q09  from  $4.3  million  in  4Q08.


        Depreciation  and  Amortization
        --  Total  depreciation  and  amortization  in  1Q09  was  $207.8  million  as
              compared  to  $207.7  million  in  4Q08.



        Liquidity

        Amounts  in  US$  thousands                                                      1Q09                          4Q08

        Cash  and  cash  equivalents                                              502,016                    450,230
        Restricted  Cash                                                                    11,228                        6,255
        Short  term  investments                                                      20,732                      19,928
        Accounts  receivable                                                          156,177                    199,372
        Inventory                                                                              154,783                    171,637
        Others                                                                                      78,728                      79,437
        Total  current  assets                                                        923,664                    926,859

        Accounts  payable                                                                135,352                    185,919
        Short-term  borrowings                                                      270,078                    201,258
        Current  portion  of  long-term  debt                              359,080                    360,629
        Others                                                                                    144,146                    151,967
        Total  current  liabilities                                              908,656                    899,773

        Cash  Ratio                                                                                  0.5x                          0.5x
        Quick  Ratio                                                                                0.7x                          0.7x
        Current  Ratio                                                                            1.0x                          1.0x



        Capital  Structure

        Amounts  in  US$  thousands                                                        1Q09                        4Q08

        Cash  and  cash  equivalents                                                502,016                  450,230
        Restricted  Cash                                                                      11,228                      6,255
        Short-term  investment                                                          20,732                    19,928

        Current  portion  of  promissory  note                                29,493                    29,242
        Promissory  note                                                                      23,792                    23,590

        Short-term  borrowings                                                        270,078                  201,258
        Current  portion  of  long-term  debt                                359,080                  360,629
        Long-term  debt                                                                      533,090                  536,518
        Total  debt                                                                          1,162,248              1,098,405

        Shareholders'  equity                                                      2,573,891              2,749,365

        Total  debt  to  equity  ratio                                                  45.2%                      40.0%

        --  The  increase  in  debt  to  equity  ratio  as  of  end  of  1Q09  is  primarily  due
              to  a  decrease  in  shareholders'  equity  as  a  result  of  the  net  income
              loss  recorded  in  1Q09.



        Cash  Flow

        Amounts  in  US$  thousands                                                        1Q09                        4Q08

        Net  cash  from  operating  activities                                78,117                  171,213
        Net  cash  from  investing  activities                              (81,785)              (120,085)
        Net  cash  from  financing  activities                                54,846                      6,460

        Net  change  in  cash                                                                51,786                    57,349


        Capex  Summary
        --  Capital  expenditures  for  1Q09  were  $24  million  as  compared  to  the  1Q09
              guidance  of  $40  million  to  $45  million.
        --  Total  planned  capital  expenditures  for  2009  will  be  approximately  $190
              million  and  will  be  adjusted  based  on  market  conditions.


        Recent  Highlights  and  Announcements
        --  FlipChip  International,  LLC,  Announces  300mm  Strategic  Partnership  with
              SMIC  [2009-3-16]
        --  Grant  of  Options  [2009-2-17]
        --  Further  Announcement  [2009-2-10]
        --  Change  in  Directorate  [2009-2-5]
        --  SMIC  Reports  2008  Fourth  Quarter  Results  [2009-2-5]
        --  Extraordinary  General  Meeting  Held  on  February  3,  2009  Poll  Results
              [2009-2-3]
        --  Change  in  Directorate  [2009-1-29]
        --  SMIC  releases  preliminary  version  of  three  65-nanometer  Standard  Cell
              Libraries  [2009-1-21]
        --  Notice  of  Extraordinary  General  Meeting  [2009-1-15]
        --  Letter  to  Shareholders:  Website  notification  letter  [2009-1-15]
        --  Non-Exempt  Continuing  Connected  Transactions  and  Refreshment  of  General
              Mandate  to  Allot  and  Issue  Shares  [2009-1-15]
        --  Change  in  Directorate  [2009-1-14]
        --  Closure  of  Register  of  Members  [2009-1-12]
        --  Notification  of  Board  Meeting  [2009-1-9]
        --  SMIC  (NYSE:  
  SMI  )  Schedules  Fourth  Quarter  2008  Webcast
              Conference  Call  [2009-1-9]
        --  Non-Exempt  Continuing  Connected  Transactions  [2009-1-8]
        --  Unusual  Increase  in  Share  Trading  Price  [2009-1-7]

 





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