Welcome everyone to UMC's 2021 Q3 earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question- and- answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference has finished. Please visit our website www.umc.com under the Investor Relations Investors Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.
Thank you, and welcome to the UMC's confe rence call for Q3 of 2021. I'm joined by Mr. Jason Wang, the President of UMC, and Mr. Chih-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our president's key message to address UMC's focus and Q4 2021 guidance. Once our president and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company's control.
For this risk, please refer to UMC's filing with the SEC in the U.S. and the ROC securities authorities. Now, I would like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's Q3 2021 financial results.
Thank you, Michael. I would like to go through the 3Q 2021 investor conference presentation material, which can be downloaded from our website. Starting on page 3, Q3 of 2021, consolidated revenue was TWD 55.91 billion, with gross margin at 36.8%. The net income attributable to the stockholders of the parent was TWD 17.46 billion, and the earnings per ordinary shares were TWD 1.43. Utilization rate in Q3 of 2021 was a little bit over 100%. Please turn to page 4. Sequential comparison for the income statement. Revenue grew quarter-over-quarter by 9.8% to TWD 55.9 billion. Gross margin rate reached 36.8% or TWD 20.5 billion.
Overall operating income is 15.1 billion TWD or 27.1% operating profit margin rate, grew nearly five percentage points. For non-operating income, because of the better performance in the equity market, the overall net non-op is around 4.3 billion TWD, significant growth compared to the 1.88 billion in the previous quarter. Overall net income attributable to the parent is 17.46 billion TWD or 1.43 EPS. For US ADRs, the earnings per ADS is $0.257. For first three quarters of the year on page five, revenue grew by 17% to 153.9 billion TWD, mainly based on higher wafer shipment, better loadings as well as higher blended ASP.
Gross margin rate is about 31.8% or TWD 48.9 billion. Operating income rate is 22.1% or TWD 34 billion. The net income for the first three quarters of the year is TWD 39.8 billion. The net income rate is 25.9%. Accumulated EPS for the first three quarters has reached 3.26 TWD per share. Page 6 is our balance sheet. Our current cash on hand is about TWD 113 billion after the cash dividend payout. Total equity is about TWD 257 billion. ASP continued to rise on both price increase as well as mix improvement. In the previous quarter, the third quarter ASP increase is nearly 8%.
On revenue breakdown, starting from page 8, Asia represents about 55% of our total revenue. Japan, Europe and U.S. remain relatively the same compared to the previous quarter. IDM is about 14% and fabless is about 86%. Communication is around 46% of the total revenue, and consumer is about 27%. Computer stays about the same at around 17%. Actually, almost every node is running at nearly full capacity, so the change has been minimum from a quarter-over-quarter basis. 28, 22 nanometer consists of 19% of the total revenue, and 14 nanometer is about 18%. We'll continue to see some mild capacity growth coming from both 12X in Xiamen as well as 12nm in Japan.
For 8-inch, there's some incremental increase from various fabs, especially Hejian in Suzhou in China. For the time being, the CapEx budget for 2021 remains unchanged at $2.3 billion. Majority, 85%, is going to the capacity of 12-inch related expansion. The above is the summary of UMC's result for 3Q 2021. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.
Thank you, Chitung. Good evening, everyone. Here, I would like to update the third quarter operating result of UMC. In Q3 , we continued to experience robust chip demand across computing, consumer and communication end segments. Higher 12-inch wafer shipments in the quarter reflect ongoing product mix enhancement and partially contribute to the lift in blended ASP. Overall, wafer shipment grew 2.6% quarter-over-quarter to 2.5 million 8-inch equivalents. Revenue from 28 nanometer technologies continued to rise while business engagement in 22 nanometers have led to a growing number of customer tape-outs across wireless display and IoT markets, further diversifying our product pipeline. Looking into the fourth quarter, we anticipate wafer shipment and ASP trend will remain firm. Capacity utilization across 8-inch and 12-inch facility will continue to remain fully loaded.
As gross margin continue to exhibit upward momentum, thanks to our team's effort in optimizing capacity productivities and product mix. The current business cycle provides an opportune time for UMC to strengthen customer relationship along with our technology competitiveness and the incremental capacity growth to elevate our market position. Our focus on growing our comprehensive logic and specialty technology portfolio has been welcomed by our customers, and we continue to broaden our product range to fulfill their needs. With the P5 and P6 expansion projects underway at our flagship Fab 12A facility in Tainan, given the strong demand from our customers, we are well positioned to grow and capture additional market shares in 2022. In addition, the company continued to make strides towards a greener future. Earlier this month, UMC was honored to receive the Green Chemistry Application and Innovation Award from Taiwan's Environmental Protection Administration.
The award recognized our effort to introduce chemical substitutes that minimize impact to the environment and the health of our employees. At our Outstanding Supplier Awards this year, UMC also took the opportunity to reiterate our commitment to achieve net zero carbon emission by 2050, and to invite suppliers to work with us to build a low carbon supply chain. As a key semiconductor player, UMC understands that we have the responsibility to proactively respond to climate change and to promote sustainable practice in our industry. Together with our upstream and downstream partners, we will continue work toward our net zero carbon emission target. Let's move on to Q4 2021 guidance. Our wafer shipments will increase by 1%-2%. ASP in U.S. dollars will increase by 1%-2%. Gross profit margin will be in the high 30% range.
Capacity utilization rate will be at 100%. Our 2021 cash-based CapEx will increase by 1%-2%. That concludes my comments. Thank you all for your attention. Now we are ready for questions.
Thank you, President Wang. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question. Now, please press zero one to ask the question. Thank you. First question is coming from Randy Abrams, Credit Suisse. Go ahead, please.
Okay. Yes, thank you and congratulations on the good result. I wanted to ask the first question, on capacity. Just factoring you're running 100% plus
Could you go into timing for the phase five 10K capacity, which quarter that capacity would be available? For phase six, where it's a bigger amount, the 27.5K, would that all come on at the same time? Would that be beginning of 2023? Just trying to think of timing when the new capacity would come on. Just one follow-up on capacity. There were some talks that you may consider a further fab in Singapore or additional capacity. Do you have plans beyond 2023 for additional capacity or see that potential option?
Sure. The first is for the P510K extension in the 20 nanometer will become online on Q2 2022. The P6 will be in year of 2023, but in the later year of 2023. We'll provide more specific the ramp schedule in a later date, given the current longer lead time availability update. The question about the news about Singapore we are unable to comment on any speculations as we always do that. We don't comment on speculations, but we are always open to exploring growing new opportunity as long as we can enhance our shareholders benefit. We say that before as well.
Our strategy in the disciplined CapEx philosophy from our 2016 has not changed. We always try to drive our sustainable structural profitability based on the discipline, the CapEx principle. We have aligned with our customer as well as the market to given our relevance in the marketplace before we making any CapEx decision. Meanwhile, we continue, you know, we consistently cooperating with our customer regarding the long-term development plan. Given our diversified product production side, I think UMC have the luxury to evaluate different expansion option beyond P5 and P6. We will discuss our expansion plan accordingly once we can deliver that.
Okay. For two follow-ups on that. One, you ran a few percent above 100%. Do you think as we go the next year, if demand is there, that would be the level you could operate? Or was there anything specific this quarter that you were able to push out more? Is that a level you could sustain? The other follow-up was, since the P6 will be later 2023, besides the 10K, is there. How much can you get from the bottlenecking or other areas where I saw Q4 you have a bit of that, but if you have any other meaningful capacity?
Well, I mean, in 2021, we have continued focus on the productivity improvement in addition to the incremental capacity, and we will do so for 2022 as well. We do expect that effort will continue. At the current plan, I think the you know, we are targeted greater than 100%, right? But as what we guided, we will guide it as a fully loaded at 100%, but the effort will continue.
In terms of capacity, growth for 2022, we currently estimate about 6% capacity increase versus 3% capacity increase in 2021.
On 8-inch, is there any increase or is that all pretty much 12-inch?
It's pretty much all 12-inch now. The debottlenecking of a product migration will probably continue, but it's still within the same pool. Yeah.
Okay, great. I wanted to ask on pricing, if you could give any look at how you're seeing pricing after this year. It looks like it might be up close to mid-teens for next year. If you see how you're seeing mature node, and then also if any chance to reset the 28 nanometer. If there's a way to think about where gross margins could go.
Okay. Well, first of all, we do foresee the ASP momentum will continue into 2022. However, we're not taking advantage of our customers during the wafer shortage. We kind of positioning our ASP in a more longer-term partnership over the near-term cyclical factors. We kind of work with the customer to earn their trust and, you know, instead of exploiting the short-term opportunistic profit. We do believe the pricing will reflect our market value and position. We foresee the ASP momentum will continue into 2022. You know, at this point for the 2022, we anticipate the capacity will remain full on both 12-inch and 8-inch.
Our 2022 outlook will outpace the foundry industry growth and overall, the growth will come from a capacity increase, productivity improvement I mentioned earlier, as well as the ASP. As far as for the 2022 full year ASP, we'll be able to provide you some guidance in the Q4 2021 conference call.
Just a last question on. I'm considering, like, a downturn protection if we eventually ultimately go into the next downturn. Do you expect new price level, or do you think the same kind of flexibility where we'd see a reversal? Like if it were to drop back to like 80 utilization for an extended time, like would we go back to kind of reversal or do you expect some firmness?
Well, I mean, I think the pricing is reflecting your market position as I mentioned earlier. As far as for the downturn, we have continuously strengthened the company's competitiveness, right? That includes many areas. One is we continue to prepare ourselves for the downturn and because it is a cyclical industry. While focused on the structured demand in many mega trends, 5G, EV, and IoT application, we have aligned it with the key players in our first tier customer through the technology offering that we have, and so UMC as the sole source. In addition to that, the CapEx approach, you know, we deploy requires some of the risk mitigation with the customer commitments.
In addition, we validated customers' confidence in UMC via some of the increases in long-term agreements for future capacity expansion arrangements. Giving all those efforts that we have spent in the past years, in addition to what we just mentioned also on financial-wise, we believe the company has become more resilient in the event of the macro uncertainty. Therefore, I think the ASP will probably play less of a role under such conditions in normal.
Okay, great. Thanks a lot, Jason. Keep up.
Sure. Thanks.
Next question is from Gokul Hariharan of JP Morgan. Go ahead, please.
Yeah, thanks. Congratulations on the good result. My first question is about gross margins, just leading on from what Randy asked. We have seen a pretty strong gross margin expansion for UMC. Looks like we're still going to see further gross margin expansion. Could you talk a little bit about how you think gross margins settle down long term now that you have some visibility into some of the contracts that you have signed for the new capacity? Historically, I think one player has had very high gross margins, and everybody else has been at a much lower gross margin level. How would you characterize this era, given that you also feel a little bit more comfortable about managing any potential downturn risks as well?
Could you talk a little bit about how UMC thinks about gross margins over the next, let's say, one or two years, not just on a quarter-to-quarter basis? That's my first question.
Wow. That's really... Well, first of all, like you said, from a short-term wise, we do expect the momentum in our business growth and profitability will continue beyond Q2, Q4 2021. You know, mainly due to the validation from our customers on the key markets and capture the structured demand. Given the value proposition that UMC provide to our customer, including our solutions, sufficient capacity and the growth path. I think our goal at this point is we will strike a balance between the profit and long-term growth. Along with our CapEx, the discipline, the CapEx. We believe our approach will reflect our profitability result in the long run. When you talk about long run, I think that requires some of the balance act here. Okay?
If we look out in the next couple years, you know, while we're announcing the P6 expansion, and so obviously some of the CapEx will happen in the next couple years, along with the long-term agreement that we have signed with the customer, and we believe we'll be able to manage that balance and at a healthy level. As far as the actual number, we probably won't be able to provide it at this time, but I think we feel fairly comfortable about our business model going forward.
Yeah. Just to add on that, we will provide margin guidance on a quarterly basis. For the next quarter conference call, certainly we will give a overall outlook for 2022.
Thanks. Thanks, Jason and Chitung . Another question I had is, could you talk a little bit about, I think, over the last few years you have increased your mix of, specialty processes, automotive and other areas for 28, 40, and 55. Could you talk a little bit about what percentage of these process nodes are already specialty, where there is a lot more sticky demand, compared to what percentage is still like pure digital, where there could be potentially more fluctuation in terms of demand?
I mean, right now for the specialty technology, it occupies a little bit over 50% right now. They are unique and customized to the customer, so it does give you a bit more stickiness in terms of the customer relationship. In addition to that, there is also a sole source product that we have engaged it. Combining with the specialty, I think the number will reach up to somewhere at, you know.
The 70, above 70 range, and along with the LTA protection. You know, in terms of overall business model at this point, we have certain confidence that, you know, they definitely have increased significantly on the stickiness side.
Okay, just to clarify, the 50% plus and 70% plus is on the overall capacity, right, for UMC?
Yes.
Okay. Yeah. Thank you very much. Thank you.
Sure.
Next we'll have Nicolas Gaudioso of UBS for questions. Go ahead, please.
Yes. Good afternoon. Thanks for taking my questions. The first one is on your LTA mechanism. If I recall, you mentioned last time that you may start to receive a prepayment from customers in Q3 for in the framework of those LTAs for the capacity coming later. Is that the case, or should we expect this to come at a later stage? Secondly, am I right to confirm that your ramp up for the phase six expansion is effectively pushed out by 1-2 quarters versus what you said last time? If so, what is the reason? Is that related to equipment lead times already at this stage, or is there any other
Are there any other factors influencing you saying that you now expect to ramp up more in the latter part of 2023 versus Q2? Thank you.
For P6, it currently is on schedule, even though the equipment, some of the bottleneck equipment, the lead time may be stretched a bit, but we're still working closely with the equipment vendors. It falls into the ballpark schedule we have agreed with our P6 partners. Majority, or if not 100% of the P6 capacity is covered by this so-called long-term agreement. It is nearly 100%, all with LTAs.
Great. In that context, how about prepayments then? Is that too early to see them, or and if so, when should we start to see prepayments coming through? Thanks.
Part of that is in this year's CapEx already for down payment, but it's a very small percentage. Majority of the payment will come along with the delivery of the tool, which will happen later 2022 and also first half of 2023. The CapEx for 2022 and 2023, we will see the majority, the bulk of the P6 related CapEx.
Great. Just lastly, a bit of a technicality, but when we actually see that coming through, will it appear in basically payables or would you do a netting of CapEx basically?
Sorry, can you say that again, please?
Yeah. Just a bit of a technicality, but you'll see that coming through in payables in your balance sheet or would you actually just net out CapEx effectively? So when you're gonna give us a CapEx guidance, would that be gross or net of those prepayments? Thanks.
Our CapEx number is on cash basis, so it's already, if we pay it, then we will be including the CapEx. There are some payable as well, but it's not,
Right.
If it's falling in other years, the following year, it will not be included in this year's CapEx.
Perfect. Understood. Thank you very much.
Next we'll have Charlie Chan of Morgan Stanley for questions. Go ahead, please.
Thanks. Hi, good afternoon, gentlemen. My first question is about what's your observation about the end demand trend? Because for some specific sub-sector like TV, you see its panel price drop a lot. Some consumer MCU markets seems to see weakness, right? If you look at those, the spot prices, et cetera. I know your fab is still full, but can you kind of give us some comments about the demand or customers' inventory? Thank you.
Sure. We did also observe some mild correction from selective market segments caused by some of the demand softness. Nevertheless, it did not affect UMC overall undersupply situation, just like you said, and which we expect this will continue through 2022. I think we haven't seen a significant concern on the inventory buildup side. Despite that, there are some inventory increase. At this point, we continue to experience strong demands, while some of the mild correction were immediately replaced by some of the unfulfilled demand, given the long queue of the customers.
I think Gokul Hariharan just raised a great question, right? About your customer stickiness, right? Is it right that you said that 70% are sticky business, meaning some customization, specialty with the LTA? Was that the right number, 70%?
Yeah, I think it's above 70%. Yeah. Above 70%.
Okay. Great. Yeah, so my question is that, how about the rest 30%, what would be your pricing strategy? By the way, I mean, you know, the company gets a greater credit to identify these, you know, the price high potential earlier than your industry peers. I'm curious about your pricing strategy for that rest of 30% business. Presumably it's a more commodity and customers has a, you know, a kind of a dual source. Thank you.
All right. We sort of touched that a little earlier.
Mm-hmm.
Our current focus is focused on some of the structured demand in the 5G, EV, and IoT applications. We believe those demands will continue, and they're here to stay. Some of the vulnerable ones, and we have some protection, and some of the mega trends associated with demand. We believe they are here to stay. Given some of the market focus as well as what we touched on the CapEx risk mitigation approach, and along with the LTA, I think we are fairly less vulnerable to this cyclical issue. We think the ASP will actually play a lesser role here. That's why, you know, we actually feel fairly comfortable at this point.
If the market dynamic does change, we'll provide you the update.
Okay. That's fair enough. I guess, for some commodity, I just to make some example, right? Like, driver IC and MCU, you know, meaning you see some potential risks, right? You know, downturn. When you kind of take those orders, you already have some protection mechanism. Is that the right way to interpret your comment-
Yeah, that's one way to put it. On the other hand, if within the driver IC segments,
Mm-hmm.
There's also OLED driver, which is.
Right.
On our momentum.
Right.
It's a combination of those. Some of them require some of the risk mitigation mechanism. Some of that actually is more aligned to the growth of the segment. It's a combination of that, yes.
Okay, thanks. Yeah, one topic that seems like people care about the Micron those issue, right? I mean, you already settled with the U.S. Department of Justice, right? I mean, six days ago, there was a news report about some ongoing civil lawsuits. Maybe Chi Tung Liu can give us some updates whether there's going to be some provision or kind of a legal expense on this case. Thank you.
Yeah. First of all, we don't comment on the news speculation. It's not a complete story.
Mm.
It's not the full picture. We don't comment on that. Also by law, we cannot comment on the ongoing litigation. We didn't have any provision based upon our legal effort. We are still working on this case. It's still ongoing. That's all we can comment for the time being.
Okay.
In other words, there's no update on any new development. No new development on this case. If there is any new development, I think we'll certainly disclose that information accordingly.
Thanks both. Jason, just think about another question. You seem to be very confident that your 2022 will outpace the foundry industry. Is that because you are expanding capacity more aggressively or you are going to hike the ASP higher than your peers? Why you have such high confidence you can outpace your foundry peers?
Well, given the current outlook of 2022, we foresee those structured catalysts will continue to drive, including the 5G transformation, you know, the EV and IoT devices. Those megatrends were still representing significant growth on year-over-year basis. We do anticipate those structured drivers will continue to fuel our growth, including the OLED driver, the ISP, the Wi-Fi 6, RF switch, MCU, PMIC, and so on. Which also lead to a higher silicon content, right? We are convinced that most of those demand surges are here to stay, largely driven by those structured needs. Given those catalysts, we have certain confidence.
I mean, in addition to that, based on our efforts and market position, that give us that confidence that the 2022 will be another strong year for UMC to gain market share.
Yeah, the consensus for TSMC is like next year to grow 15%-20%. Do you think you can, you know, perform similar or even better than these, the key foundry peer?
Well, our estimate on the foundry industry growth in 2022, at this point, is about 12%, right?
Oh, 12%. I'm sorry. Okay.
Yes. It's at 12%.
Oh, okay.
Yeah.
Okay.
For our business outlook, I think we'll be higher than this current foundry industry projection.
Lastly, variable cost. I mean, that is a key reason why foundry peers want to, you know, hike the price, right? Variable cost, no matter percentage or per wafer number, can Chi Tung Liu give us some kind of comments about a trend. For example, you know, this year over year, what was the growth for the variable cost? And what would be the variable cost growth for the coming two years? Thank you.
For the operating expenses, it will be growing along with our enlarged revenue. However, as a percentage of revenue, we hope it will be flat to down under control. The revenue growth will outpace the operating expenses growth. As for raw material like raw wafer and also the labors, they were also on the rise. Altogether, I think we are confident that because of our production efficiency improvement, our improved economy of scale, and also with a good outlook for both demand as well as pricing for 2022, I think there's still further upside for our profit margins.
Got you. Thank you. That's super helpful. Thanks, gentlemen.
Next question is coming from Roland Shu of Citigroup. Go ahead, please.
Hi. Good afternoon. Your Xiamen Fab began production from full Q4 2015. It was still loss-making last year, and I think it is still loss-making now. With the better pricing, when do you expect Xiamen Fab is going to be turned around? Also, how many margin upside or earnings upsides to UMC once Xiamen Fab is breakeven?
Xiamen should be able to be profitable in 2022. Matter of fact, they are profitable in single quarters of 2021, so we are very close to breakeven.
Mm-hmm.
in 2021. It is expected to be profitable in 2022. However, it will still be below corporate average in terms of profit margin in 2022. There's still room for Xiamen to catch up to the level of UMC's corporate average.
Understood. Yeah. Do you have the time frame, you know, of, you know, when at least Xiamen fab gross margin is going to approach corporate average?
No. We don't have a time frame. All we can say is, I can give you a rough comparison. Currently our Singapore fab has higher gross margin than corporate average.
Mm-hmm.
Japan fab is catching up to almost identical to the UMC corporate average. The Xiamen one is, as I mentioned, coming out of loss-making to nearly breakeven this year, and it will be profitable next year, but still away from the corporate average.
Okay. How about, you know, from a housekeeping point of view, how much can we, you know, model at least a subsidy from, you know, your partner in Xiamen, once, you know, next year it is going to be profitable?
Can you say that again?
I think we still have this, you know, subsidy, you know, from our partner in Xiamen for you know, Xiamen fab now is still loss-making. How about next year? How much will this subsidy, you know, we can model in our model? Yeah.
It will be similar to this year, except for the interest expense subsidy, which is already expired. Everything else will be about the same for 2022 compared to 2021.
Will be still around TWD 1 billion per quarter?
Yeah.
Okay, thank you. My second question is that, you know, now, including yourself, a lot of the foundry peers announced new capacity expansion plans. In your view, how soon will the industry to close the supply and demand gap of 8-inch and the mentioned 12-inch foundry capacity? What are the key bottleneck of this supply-demand imbalance now?
Well, I mean, we can't really comment about our peers, and we don't know what their plans are. We do monitor the market landscape and adjust ourselves. The focus here is, you know, about our capacity growth and are those new capacity vulnerable or the existing capacity vulnerable or not? Giving our newly deployed capacity will be 28 nanometers. The majority of our 28 nanometer capacity has been reserved by the LTA or single source customer.
Mm-hmm.
Therefore, we believe that capacity will be maintained at high utilization rate for a very long time. In addition, our mission to differentiate ourselves with our technology as well as the manufacturing action will enhance that stickiness. We kind of touched that earlier as well. I think we will minimize the 28 nanometer vulnerability, given our efforts and by the customer portfolio, along with our continuous reduction in the break-even utilization rate. I think, you know, as far as for the UMC relevance, we feel comfortable about that. As far as the landscape, the market capacity, you know, worldwide foundry capacity landscape goes, we will continue monitoring that.
Understood. Okay. My last question is on, you know, for your growth next year. You said you expect the overall foundry growth to be about 12%, and then you are going to outpace the foundry growth. However, for your overall capacity increase next year is about 6%. I think assuming next year you are going to fully load it of this capacity. Still, the growth above 12%, I think that you still need to rely on this ASP increase. Where will you see the ASP increase coming from? Is it mainly coming from this, you know, price hike or you still will have some, you know, product mix improvement next year?
It will be both. The ASP momentum will be a combination of the product mix improvement as well as the pricing momentum. Yeah. The price increase. Yes.
Yeah, but it seems, you know, like, your 3Q, most of the capacity have been fully loaded, so you really did not have too many product mix improvement, you know, according to, you know, the, you know, by technology node. I think this probably will be still the same next year because you guided on your, of the, your 8-inch and 12-inch capacity will be fully loaded. Yeah, I expect this, you know, product mix improvement probably will be also very limited. That means that, you know, for next year, you probably are still going to see more than 6%, you know, ASP, you know, improvement purely from this, you know, price hike. Is that right?
No. I mean, first of all, the 6% is capacity increase for the year, and that's mainly for the 10K on P5.
Mm-hmm.
That will kick in Q2 of 2022.
Mm-hmm.
Since the P5 is all contributed at the 28 nanometers, from a product mix standpoint, it has a lift to the ASP as well.
Okay.
is really coming out from the new capacity. In addition to the productivity improvement that we have demonstrated in this year, we expect there will be some coming from the factory side for the productivity improvement. Along with the planned ASP improvement, we expect we will outpace the foundry projected growth. Yes.
Understood. Okay. It's helpful. Thank you.
Next question is from Zhihong Zhang of China Renaissance. Go ahead, please.
Oh, hi. Good afternoon, gentlemen. My first question regarding capacity expansion. Based on the current clean room space available in Singapore and Japan, how much more capacity in theory we can add in those two areas?
Well, we have some footprint available. One is in our Japan fab, and we have some of the incremental footprint available in our Fab 12A, the P6. In addition to those two locations, we have, for our Xiamen facility, we also have a second phase footprint available to us. Meanwhile, we continue to be open to the other new opportunity as well, given the current market dynamics. The future expansion footprint is always on our roadmap.
Mm-hmm.
We'll continue monitoring that. Yes.
I see. Outside Taiwan, outside China, let's say in Singapore, how much more capacity we can add just based on the current clean space we have?
At this point, Singapore is 100% full.
I see. Got you. Yeah. Second question maybe for Chitung. Regarding the investment income, actually the company benefited quite a lot from the investment income for the last couple of quarters. For modeling purpose, how should we model that line?
Well, it's highly correlated to the stock market performance given our funds investment portfolio. I guess it's going to be related to the future performance of the equity market.
Mm-hmm.
In the meantime, for the Q3 , we actually received about TWD 770 million of dividends from our investees. Q3 is always the peak season in terms of-
Sure.
our dividend collection.
Mm-hmm.
That's adding to the numbers for the third quarter.
Oh, okay. Got you. When I try to look at the breakdown, there's a line called gains on financial asset at fair value through profit or loss. Fair value is also dependent on the equity market performance, right?
That's correct. Yes.
Oh, okay. All right. Okay. Thank you very much. Congratulations on the good result. Yeah.
Next question is from Brett Simpson of Arete Research. Go ahead, please.
Yeah. Thanks very much. I had a question on display drivers. UMC has a high market share here, so can you maybe just help us understand what portion of current sales is coming from display drivers at the moment? Thanks.
Well, I mean, we actually don't do a breakdown by the applications. For the high voltage process, if we break down by high voltage process, which representing majority of the display segment, the high voltage representing our 30% of our specialty portion. Yeah.
Okay, great. Thanks. I know you include some of the customers in display drivers with long-term agreements, but is this the sort of business that can commit to long-term agreements? We've seen obviously some huge price hikes for some of the customers in display drivers, and some would say these are unsustainably high. I'm just keen to get your perspective on how you see driver IC customers delivering on some of your contractual terms, and to what extent you're insulated from volatile swings in display driver fundamentals. Thanks.
Well, I mean, that's very good question. Since we have a larger exposure on the high voltage side, we kind of become more selective. Within the high voltage space, there are also different subcategory. For those that they have alternative solutions and are more vulnerable to the physical factors, we actually try to minimize those volumes. We actually more concentrate in the area of the higher growth segment and as well as has a more of automotive segment, has a longer life, higher qualification requirements, so they tend to have a higher stickiness. We tend to be more selective within our high voltage space.
That sort of give us the confidence that they'd be able to keep their contractual obligations.
Right. That's very helpful. Just on LTAs, can you maybe just help us what specific portion of sales is covered by LTAs at the moment, and how might this change next year? I guess can you share with us, you know, does the LTAs include, is it wafer capacity guarantees or is it more pricing guarantees or both? You know, under what conditions are you setting LTAs today? You know, could these be renegotiated by customers at some point in the future? Thank you.
It's actually pretty complicated, and I'll decide whether or not to elaborate in detail. In a general sense, it is really more CapEx related, and then we have a bit of a longer-term LTA coverage, and if that's non-CapEx related, and we have more of the LTA under so-called capacity reservation approach. Most of the LTA does have both the pricing and capacity included. It's a combination of many. Given the condition of the supply and reservation situation, we align with our customers for those LTA conditions.
Yeah. For the percentage, like I mentioned earlier, nearly 100% of the P6 related capacity are covered by LTA. The remaining capacity also we are seeing the increasing trend. The new orders are covered by LTA as well. Unfortunately, we don't disclose the percentage. Jason did mention that LTA plus single source consists more than two-thirds of our overall capacity and looks like the LTA trend is continuing.
That's helpful. Thank you.
Next one is Bruce Lu, Goldman Sachs. Go ahead, please.
Okay. Good afternoon. Thank you for taking my question. I think I remember Jason, two quarters ago, talk about why, you know, 8-inch pricing is pretty much fully, you know, reflect your value, but you need to work on the 12-inch. My current assumption is that for 2022, your pricing will fully reflected your value. However, my question is that even with that, again, that was my assumption that the growth margin is still have some gap with the industry leader, even for the fully depreciated 8-inch. My question is that either the value is not fully reflected or the productivity gap with the industry leader is still, you know, there is still some gap. Which one will it be?
If that is, if that has to do with the productivity, when can you narrow the gap and to see another level up of the profitability?
Well, first of all, I don't think we ever give a breakdown of the 12-inch and the 8-inch in terms of the 8-inch profitability. We did comment about the 8-inch ASP, but you know, usually we typically don't give a breakdown on profitability of 8-inch. In our internal data, we actually feel a little bit different. We have a different perspective than what you just comment. We actually feel fairly comfortable about our 8-inch market position. I think the gap between us as a blended result compared to, you know, the peers. I can't comment on peers, but we believe there is also a matter of the scale and also the mix of the product.
It does definitely have a difference between different companies. We're gonna continue improve our solution competitiveness and along with our manufacturing side, you know, plus, you know, the incremental capacity support that we have aligned with our customer. We believe we can continue to enhance our market position by bridging the gap. I think we are making good progress, and I think there's still some room, and I but I think we're fairly close, yes.
I'm sorry. Let me clarify. Because in the past when Hejian was trying to list in China, the gross margin for the eight-inch fab was disclosed at IPO, at least for the Hejian. That was somewhere around like, you know, below the industry peer or even below the industry leader. What Jason just mentioned is that the latest internal data suggested that your eight-inch profitability is actually very competitive. Is that the right understanding?
Yes. If you look at our overall eight-inch operation, yes.
Okay. The next question is regarding the compound semi. I think UMC has a subsidiary for the compound semi. Recently we do see some stronger than expected demand for that. Can you comment on your strategy for the compound semi? Are you going to expand it or you know, what's the key application? What's the target for your compound semi business?
Well, I mean, this is definitely an area, important area for us, and we have devoted to this market, and we have putting our resource and the technology development team on the project. I think the market has, you know, significant potential. At this point, we're still relatively small at the early stage of the business development. But we remain pretty confident about that. Within the compound space, there are different market segments. At this point, we are in the process of deciding, you know, on some of the selected area that we believe we can be relevant. Once we have concluded that, we had to be able to share that with you.
We're not gonna go all out to address the overall compound, but there will be selected area that we're gonna be focused on. Focus on those area and continue executing our plan to make sure that we will be relevant within those space.
Will you turn aggressive in terms of expanding your capacity for the compound semi?
I mean, given the compounding, you know, market outlook, I don't think the capacity is at a critical juncture yet. We have sufficient capacity to support our current activities. Once the demand requires additional capacity, we'll definitely aggressively pursuing it. Yes.
Understand that. Thank you.
Sure.
Next one, Frank Lee, HSBC. Go ahead, please.
Thank you, guys. I just wanted to ask maybe a longer-term question in terms of, we've seen, I guess, in the industry, some of your peers are now talking about expanding and even maybe expanding in other countries. We see a lot of discussions about, you know, other, geopolitically about countries wanting to reestablish, you know, the semiconductor supply chain. Is this something that UMC would consider as well in terms of expanding in other regions outside of Asia?
Well, we have been very diversified. You know, we have facility in Japan, we have facility in Singapore, and China as well. We have been very diversified in the past, and we will continue to do that, and we'll continue exploring that. You know, given the recent hype of the semiconductor market, I think many countries or many regions are adopting some of the incentive plan for building a facility in those locations. We certainly are evaluating those. The key to building a new greenfield facility is not only the ROIs, also the customer engagements. We are open to customer feedback and along with ROI considerations, and we'll definitely, you know, make sure that we follow our disciplined CapEx philosophy.
If there is a decision on certain location, we'll disclose that accordingly, yeah.
Okay. Thank you. I have just a follow-up question on. I guess the CapEx and capital intensity. Based on your CapEx for 2021 of TWD 2.3 billion, it seems to suggest your CapEx to sales is gonna rise to about 30% versus 15% last year. As we go forward in the next couple years, should, how should we think about this capital intensity business? I know you have an LTA for your P6, but just in general, should we still be thinking at 30% as kind of a new norm, or can you give us any kind of clues or indication of how we should think about this?
Yeah. We don't really do capital intensity. In a way, we do monitor our possibility structures and our affordabilities. More importantly, as Jason mentioned, it also related to customer engagement and our technology differentiation, et cetera. We want to be a relevant player, and customer can stick with UMC for longer term. All the CapEx is not really on a pure capital intensity point of view. It's a combination of various reasons.
Okay. I guess so there's no real target that we should look at in terms of what that capital intensity will look like, 'cause I think it's quite a big change in the past year. Going forward, there isn't any explicit target we should think about.
This is a boundary, internal boundary. I mean, we don't want to overspend, for sure. We don't want to be overly aggressive in terms of, affordability. We don't also, just for the sake of spending, would we. If we have money and we just spend it's not the case. We really have to protect it by the customer's, risk mitigation, methodology and as well as, the future longer term, corporate development plan. Even we can afford it, we may not do it. Depends on the customer's, needs and customer engagement.
May I add?
Okay. Thanks.
May I add? The capital intensity is more of the after the fact measurements, right? I mean, the condition that we measure on is really, you know, if we invest at the right time, at the right place with the right node and with the right customer. If we believe is, you know, is within the UMC affordability level and meeting all the conditions that we set out to do and follow our CapEx discipline philosophy, and then we'll release the CapEx, and we'll present and approve that CapEx, you know, and then release it. The after the fact is definitely be able to come back and measure that intensity issue. You know, the intensity wasn't the first level consideration. Yeah.
Okay. All right. Thank you very much.
Thank you. We are taking the last question. The last one, Gokul Hariharan of JP Morgan. Go ahead, please.
Yeah, thanks. I just wanted to delve into some of the demand-related dynamics, given there is a lot of concerns about cycle ending among investors. How does UMC management look at and assess the demand book? And how do you get comfort about continued growth into next year, especially I think you're modeling foundry industry to grow double-digit and UMC to grow even faster than that. Could you share with us some of those, like, how you kind of develop comfort around that fact? And is there some kind of book-to-bill or a non-supported demand kind of expectation that you monitor which you can share to give some comfort to the market as also? Thank you.
Well, we did observe some of the softness, as we mentioned earlier. In 2022, despite a lower contribution in wafer demand associated with the work from home and home learning, we still expect some of the demand will continue, and we call it structural demands. You know, 5G, EV, IoT, and those demand remain strong. We still have a significant unfulfilled demand, you know, within those segments. While we're estimating the growth of the market is at 12%, along with our current alignment with the customer, we think we'd be able to outgrow that. We have been tracking the overall inventory situation.
We see some rise of inventory, but we also see some of the shortage components. You know, there's some of the longer lead times, shorter lead times. We have some triangulation that, along with the end customer and the direct dialogues that give us the confidence that, you know, we're still on the shorter side of the supply side. While we are still under the catch-up mode and it further validated that, you know, some of the shortages being fulfilled with the unfulfilled demand immediately. We've still, you know, we still feel confident about the 2022 outlook.
Okay. Thank you very much.
Sure. Thanks. Yeah.
Thank you. Ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. I'll turn it over to UMC Head of IR for closing remarks.
Thank you, everyone, for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir@umc.com. Have a good day.
Thank you. Ladies and gentlemen, that concludes our conference for Q3 2021. We thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com under the Investors Events section. You may now disconnect.