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SMIC Settles Lawsuit, Sets Target

Semiconductor Manufacturing International Corp (SMIC) saw its stocks in Hong Kong rise 6 percent Monday, after the company reached a settlement with its competitor Taiwan Semiconductor Manufacturing Corp (TSMC) and released its financial results for the fourth quarter.

The biggest semiconductor maker in the Chinese mainland said yesterday that it had settled litigation with TSMC over patents and trade secrets.

TSMC sued SMIC in December 2003 in the United States claiming the latter had infringed upon its patents and stole trade secrets by paying off TSMC employees.

"We are pleased that the litigation has been settled peacefully and believe that the settlement is in the best interests of the company's long term development," said Richard Chang, president and CEO of SMIC.

According to the agreement, SMIC will pay US$175 million in six installments over six years.

The two companies will cross-licence their patents until 2010 and TSMC will drop all legal action against SMIC.

Wu Xianfeng, a semiconductor analyst with Guotai Jun'an Securities in Shenzhen, agreed the settlement will not adversely affect Shanghai-based SMIC's development.

However, he believed the huge sums involved in the settlement will increase the burdens on the biggest semiconductor company in the Chinese mainland.

SMIC will pay US$30 million in the first five years and US$25 million in the sixth year.

According to Wu's estimation, SMIC's profits could hit US$108 million in 2004 and US$144 million in 2005, without figuring in the settlement, meaning US$30 million a year will undoubtedly hurt SMIC's profitability.

The Hong Kong and New York-listed SMIC said it is still evaluating the impact of the settlement on the company's financial results, adding the figures should be expected in four to six weeks.

But in some good news for the domestic giant, the Chinese Government said in September it would raise value-added tax rebate rates on the exports of semiconductor companies from 13 percent to 17 percent from November, a move that will help offset the damage to profits from the settlement.

With an estimated US$1.45 billion of sales revenue in 2005 and an 80 percent export level, Wu estimated that SMIC will receive US$46 million from the additional rebates.

The Shanghai-based semiconductor company also said yesterday that its sales reached US$291.8 million in the fourth quarter, rising 6.2 percent over the previous quarter and 101.2 percent year-on-year.

SMIC's Chang attributed the climb to increasing capacity and shipments as well as strong growth in the Chinese mainland.

In the past quarter, SMIC's average monthly wafer production capacity grew by 21 percent quarter-on-quarter to 102,615 units, while wafer shipments reached 303.796 units, 15.2 percent higher than the previous quarter.

Among the firm's 19 new customers in the fourth quarter, 12 were in the Chinese mainland.

Wu from Guotai Jun said he believed that although the semiconductor industry has been experiencing a slowdown since the third quarter, SMIC is still a young company with a strong growth momentum.

(China Daily February 1, 2005)

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