United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2020 fourth quarter earnings conference call. All lines have been placed and minged 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 a question. For your information, this conference call is now being broadcast live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website www.umc.com under the Investor Relations Investors Events section. And 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 Conference Call for the fourth quarter of 2020. I am joined by Mr. Jason Wang, the President of UMC, and Mr. Chi-Dong Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our President's key message to address UMC's focus and the first quarter 2021 guidance. Once our President and the CFO complete their remarks, there will be a Q&A section. 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 the 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 IOC security authorities. Now, I would like to introduce UMC's CFO, Mr. Chidong Liu to discuss UMC's fourth quarter 2020 financial results.

Thank you, Michael. I'd like to go through the Q4 2020 investor conference presentation material, which can be downloaded from our website. Starting on page 3, Q4 of 2020, consolidated revenue was $45.3 billion NT, with a growth margin at 23.9%. The net income attributable to the stockholder of the parent was 11.2 billion NT and earnings per ordinary share were 92 cents NT dollars. Capacity utilization rate in Q4 climbed to 99% compared to 97% in the Q3. And if you turn to page 4, our quarterly comparison financial performance, revenue increased about 1% after the NT dollar impact, reached 45.3 billion NT. Growth margin, 23.9%, or 10.8 billion NT. Because of some employee-related compensation and also share-based scheme, our operating expenses increased to 6.3 billion in the fourth quarter of 2020. And as a result, operating income is around 5.6 billion, or 12.4%. And because of the strong stock market, our mark-to-market valuation has contributed to most of our non-operating income in Q4 2020, which was 5.6 billion NTD. So our net income in Q4 last year was $10.9 billion, and net income attributable to the stockholder of the parent is $11.2 billion. EPS is 0.92. On page 5, which is a year-over-year comparison, our revenue growth 19.3% in NT dollars to $176.8 billion. In U.S. dollars, the growth rate was roughly around 26%. And among the growth, around half is contributed by the combination of USJC in Japan. And growth margin grew to almost 8 percentage points, to 32.1%, or 38.99 billion NT. Operating expenses is Similar to the revenue, we also have some combined expenses from USJC and increase year-over-year around 6.6%. Operating income jumped, rose 369% to 32 billion NT. Operating margin rate was 12.5%. Net non-operating income is around $5.9 billion, which is a similar reason as the Q4 result. And net income attributable to the stockholder of the parent for the full year was $29.2 billion, or 16.5%. And full-year EPS is $2.42 per share. So on page 6, our balance sheet highlights cash remained around 94 billion NT, and total equity has increased to 235 billion NT dollars. For Q4 of 2020 on page 7, our blended ASP increased a little bit less than 2% in the fourth quarter of last year. And for revenue breakdown on page 8, Asia continued to climb to 61%. And the other region doesn't really change much. For the full year, it's almost identical year-over-year comparison in terms of geographic breakdown from page 9. For page 10 and also page 11 is the revenue breakdown by customer type. And IBM continues to be around 12% to 13%. for both Q4 and the full year of 2020. On page 12, revenue breakdown by segment, communication declined a little bit to 49% in the fourth quarter, and computer is the highest growth segment in the Q4 of 2020. Again, for the full year segment breakdown on page 13, ratio didn't really change much on a year-over-year comparison. On page 14, our 28nm percentage of revenue continued to increase. In Q4, now it's around 18% of our total revenue. And for the previous quarter, 28nm revenue was 14%. And for the full year, 28nm net revenue grew from 11% in 2019 to 14% in year 2020. Page 15 is our capacity breakdown table . Because of the shorter working days and also Chinese New Year holidays in Q1 2021, our available capacity is a little bit less than that of Q4. However, we continue to extend our capacity mainly in our 12a, 12x, as well as 12a and also 12m. So for the full year capacity, we continue to see quarterly growth starting from Q2 of 2021. For our annual CAPEX budget, Current forecast is around 1.5 billion U.S. dollars for 2021. And the breakdown is about 85% 12-inch related and also mainly focused on 20 nanometers. So the above is a summary of UMC's results for Q4 2020. 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 Wong.

Thank you, Shidong. Good evening, everyone. Here I would like to update the fourth quarter operating result of UMC. Our business traction in Q3 carried over into Q4, lifting utilization rate to 99% and rising weight achievement to 2.3 million 8-inch equivalents. The stable capacity utilization was driven by robust and market demand on consumer and computing-related applications. such as Wi-Fi, digital TV, microcontroller, and power management IC. For four years 2020, UMC's revenue grew 26% in U.S. dollars, while operating income surged to NT$22.01 billion. Reflecting solid utilization rates across both 8-inch and 12-inch facilities and optimization of our blended product mix, in particular, or enhance the 12-inch product mix primary resulted from the substantial pick-up in 28nm wafer business as well as our successful integration of USJC 12-inch operations. Looking into the first quarter, stable demand outlook will lead to an incremental increase in wafer shipment and blended ASP in US dollars. However, Due to the continuing unfavorable foreign exchange rate, we anticipate the appreciation of the ND dollar will offset more than half of the implied growth project for Q1. For full year 2021, UMC continues to share the boundary industry's positive view in ways of demand. Hence, we will continue with the company's disciplined and measured a budget of U.S. $1.5 billion to accommodate the strong demand outlook in advanced technologies. Let's move on to the first quarter 2021 guidance. Our wave assurances were increased by approximately 2%. ASD in U.S. dollar were increased by 2% to 3%. However, the surging NT dollar were wiped out More than half of the implied revenue growth, as reported earlier, now allow me to explain in Chinese as well. 在第一季的展望中,超过半数的基因收成长将会因为新台币升值而消失。 Growth profit margin will be in the mid-20% range. Capacity utilization rate will be at 100%. Our 2021 cash base, CapEx, will be budgeted at the U.S. $1.5 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Yes, thank you, Mr. Wong. 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 01 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 02 to cancel the question. Now please press 01 to ask the question. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Okay, yes, thank you. Good afternoon and a good result. I want to test the first question on credit. The shipment and ASP outlook, first on shipments with utilization now at 99%. Can you discuss how much additional shipment growth you can squeeze out this year from your capacity? So if you could give a sense on how much capacity additions through the year you'll have on 12-inch and 8-inch.

All right. So, first, thank you, and for the guidance of Q1, we project the weight measurement will increase slightly, and primarily due to a higher utilization rate driven by the strong demand as we reported earlier. We're already at 99%, but we project Q1 will be 100%.

Maybe just a thought first on that. I guess the follow-up through the year, since you'll be at 100%, could you discuss the capacity additions? Because I know you had Shambin coming on. So when the additional capacity will be available? If you could discuss on 12-inch and then de-bottlenecking mature nodes, like how some of these labs may ramp to add capacity through the year.

Well, from a year-over-year standpoint, the 2021 capacity will grow about 3% in 2021.

Okay, yeah.

And that will split between the 8 and 12-inch. The 8-inch due to the limited clean room space, and we're only doing the optimization and productivity improvement, so that will probably be about 1% increase on 8-inch, and the 12%, about 5% from 12-inch.

Okay. Actually, a follow-up, and then I'll get to ASP. On the 8-inch job where there's very limited space, there was discussion a few months ago about purchasing 8-inch capacity from Japan. Could you discuss, I guess, opportunity to acquire capacity or otherwise your view to grow the customer base on 8-inch? Is your plan to eventually find a way to add capacity, or is it to transition customers into 12-inched?

Well, I mean, that's, well, first of all, from the 8-inch greenfield, you know, from our existing clinical space, there is a limitation there, okay? And as far as the inorganically, we are unable to comment on any guess or speculation, but we are always open to exploring new opportunities as long as they can enhance our shareholders' benefits. So we are open to the inorganic approach The comments of your question about if we are migrating the 8-inch to 12-inch, that is an ongoing effort. It's subject to a different application and the customer's alignment, and that will be an ongoing effort for us.

Okay, great. And I guess now for the question on pricing, can you discuss that for blended AFP? You'll have two moves, like 28-nanometer ramping. But also, I'm curious for additional pricing action, how you expect over the next few quarters ongoing ASP trend, if you could discuss that.

Well, the Q1, first of all, the Q1 ASP guidance was a result of an increase due to a higher 28 nanometer weight assurance and some of the pricing enhancement in the A engine as well. the technology migration in the 12-inch business. We're migrating some of the product into a different, the next note. The overall blended ASP will increase by two to three percent quarter over quarter in Q1 in our guidance. For the ASP, we always keep commitment to our long-term customers. However, we do believe the AST should reflect our market value based on the technology's competitiveness as well as our manufacturing excellence and, you know, along with our commitment to our customers. So, therefore, the AST is more of a result of many different factors. You know, if the question is about 2021, based on all those factors, we'll need to set a mid-single-digit percentage year-over-year in AST increase as our goal. in 2021 at this point.

Okay, great. That's helpful. And just one final question. The earnings with some of the non-operating income at 242, how would that translate? Because your payout has always been a target to be a high percent, but the earnings grew quite a bit. So if there's a framework to think about payout of the higher earnings you generated.

We, of course, will continue high payout dividend policies. And I think for the cash dividend, we do see the potential for the 2021 payout to be likely double from last year. But this is also subject to the board approval.

Okay, great. Thanks, Jitaji.

And the next question is coming from Sunny Ling, UBS. Go ahead, please.

Hi, thank you for taking my question. Congrats on the very good results. Number one, for your KPAGS, it's quite a bit above the level in the last few years. So I wonder, out of the 5% extension for your 12-inch, what specifically 20 is going to extend for this year?

In 2021, 28-millimeter capacity will increase by 20% year-over-year.

Got it. So that's above what you guided before. I think previously you were guiding for 40K worth of per month to about, I think, 52K worth of per month by the end of this year.

The 28-millimeter total capacity peak, Combining the high K and polycylons, we have about 45.6 K per month at the end of Q4 in 2020. And we are projecting by end of 21, Q4 21, will be 59.3 K per month.

Some of the new 28 nanometer capacity also comes from the transition of 14 nanometer capacity. So it may not be all green fields.

Got it. So a very quick follow-up. How does this change your expectation on depreciation for this year and next year?

The depreciation curve still will be trending down, as we mentioned before. Of course, the slightly higher capacity in 2021 will, of course, alter the depreciation curve. for the next few years, but not that much. So we're still expected to see about 5% decline year over year in depreciation for 2021. And the decline rate should be more in 2022, followed by even more significant decline in 2023. But let's focus on 21 and 22 first.

Got it. Thank you. And my second question is on mature 12-inch. So it looks like mature 12-inch boundaries are also seeing pretty strong supply demand from late last year. So following some of the price negotiations on 8-inch, should we also expect some price hike for 12-inch in the following few quarters?

Well, the earlier quoted ASB projection for the year is a blended ASB reflected combination of an 8-inch and 12-inch price. or, you know, A and G equivalent. So that will be a good reference for you to use.

Got it. Thank you. Very helpful.

And next we'll have Rolling C of C to group for questions. Go ahead, please.

Hi, good afternoon and congrats for the good result. First question, you said your first quarter capacity is loaded under 100% utilization. So is this 100% across the board? I think my question is specifically about 28 and 40 nanometer. So compared to your average 100% utilization, how about the capacity on 28 and 40 nanometer doing in first quarter?

Well, the overall is 100%. And both the 8-inch and 12-inch are 4 at 100%. So the motor nodes are 4.

Yeah, motor nodes are 4. How about the 28 and 40?

Both are 4.

Okay, both are 4. Okay, thanks. And second question is for your gross margin. So your revenue last year already achieved record high. However, I think there is still room for gross margin to reach a last peak level around 30% in 2010. So how do you expect your margins in maybe next one to two years? How soon will the gross margin go back to 30%? Thanks.

Yeah, maybe I can answer first. Basically, every 1% increase in HD will contribute more than 0.5% gross margin. So it really depends on how much HD increase. Also, $20 appreciation also has some negative impact on our gross margin. So every 1% of $20 appreciation will eat about 0.4% of the gross margin. And we also show the benefit of economic scale and also better product mix and cost reduction. And more importantly will be our performance for both our 12M, the Japanese subsidiary, as well as our chairman subsidiary. Currently, our chairman subsidiary still post operating loss. given the early stage heavy depreciation. But their performance has been continuing to improve because of the higher loading and also higher 28 nanometer production. So that will contribute a certain percentage of gross margin increase.

Understood. So how do you see the ASP increase? Are we able to have this 10% ASP increase in the near future?

I commented earlier, the ASP has many factors that have to be considered. So along with all those considerations, we're expecting our ASP will reflect our market value based on our current market position. And that's what we continue striving for. Just like Qigong mentioned earlier, the continuing to improve our corporate earnings is our principle. So as we continue improving productivity, driving cost down, enhancing product mix, as well as moving the ASP to a reasonable market, reflecting our market value. At the same time, we're managing our depreciation curve. That means the UMP will execute our plan to improve our overall corporate earnings.

Okay, thanks. It's clear. These are all my questions. Thank you.

Thank you. And the next question is coming from Bruce of Goldman Sachs. Go ahead, please.

Hi, thank you for taking my question. A great result. I want to ask about the profitability for the 8-inch and 12-inch, especially legacy 12-inch. Okay. Let's remove 28 nanometers out of the equation because the depreciation is still on the way. So, what is the price gap between the industry leader for age and legacy talkage for UNC? I mean, do we see the reasonable cost gap between you and the industry leader? So, what is the optimal profitability for the age and the legacy talkage?

Well, I mean, that's an interesting question. In general, we do believe there is a potential in terms of our market price. Again, the ASP results are many different factors I mentioned earlier. We have to actually first executing our technology manufacturing and while maintaining our commitment with our customers, So eventually, you know, we can try to win-win results for both our customer and UMC. So the bottom line is we need to be a trustworthy partner for our customer while we're managing our ASP to a reasonable level. I can't really quote you a percentage specifically, but I do believe there's a potential to get to that, yeah.

Let me ask the question in a different way. I mean, you know, when the company tries to do this IPO in China, you do provide your current profitability, which is about like, you know, mid-30s percentage in terms of the gross margin. So compared to TSMC for their age, which is around 50%. So the profitability gap is about 15%, which makes me reasonably assume that the price gap or some kind of cost gap, right? I mean, given the current situation or given your execution has improved, the cost structure has improved, so what is the reasonable, can we assume that you can achieve 50% sometime in two, three years or that is the way to high bar to achieve?

Well, I can tell you this. From the 8-inch operation, we are very close to where our market value is. But again, the blended AST including a product mix as well. So some of the product migration has to take effect to reflect the gap. And from those applications, we may already have a certain commitment, so that will take some time to manage that migration. But if you're talking about from Apple to Apple standpoint, our 8-inch ASV is very close to what the market value is.

Wow. So how about legacy 12-inch?

Legacy 12-inch also, again, is resolving on current product mix. So the product mix improvement is an important area for us to continue to enhance. If we do the Apple to Apple comparison, I do think from the 12-inch material, there is still some potential there.

I see. So, from an investor's perspective, we can reasonably assume that the profitability for 8-inch will remain at a high level, but we can expect some profitability improvement from the legacy top-inch.

That will be our goal, yes.

Thank you. The next question is regarding your capacity. I mean, in addition to the 28 nanometers capacity expansion that you guided, do you have any plan to expand like legacy 12-inch? I mean, based on current wafer pricing, is it profitable or margin acquisitive to increase the capacity for the legacy 12-inch?

The economics on the legacy 12-inch, at this point, it remains very challenging, okay? So, the part of our 2021 CapEx that we invest, we're including for some of the specialty capabilities, capacity capabilities, within the legacy side. I think those have a justifiable economics. But if you're talking about the greenfield logic, capacity for the mature 12-inch, I think the bar is very high. It remains very challenging to me economically.

Thank you. I think I want to squeeze one last question which is the R&D expenses okay for 2020 the R&D expense is still like you know 7.5% so what is the target for 2021 and maybe 2022 and absolute R&D expenses actually went up in 2020 versus 2019 I mean after like giving after starting the advanced R&D for the advanced node So can you provide me more harder, you know, about that these are the expenses increased other than the higher employee bonus?

Oh, that's a very good question. I mean, let me see if I can answer this way. It's our belief, you know, and our goal. We want to try to become a living purebred foundry in some particular applications with one comprehensive process solution. and manufacturing excellence, and sizable capacity offered in both 12-inch and 8-inch crafts, and along with our strong climbing portfolio. We think with that, we can actually help UMC to become an important player in this industry. The funding capacity has been tight for some time, as we all know. The tightness in capacity availability is more pronounced in the 8-inch advanced and the 12-inch mature. And demand from those nodes significantly outpace the growth in capacity. And we believe the supply and demand imbalance could likely lead to a structure shift in the semi-market dynamics. So for UMC, this is our technology know that we need to continue to focus. And therefore, UMC has become more relevant to the market and trust with our customer success. In addition, we need to commit and we are committed to strategically allocate meaningful amount of R&D into the R&D investment to sustain the technology leadership in our focused and particular applications. Areas such as high voltage, those are new. RF SOI, PMIC, ultra low power, embedded non-flash memory, those are all important and that require us to remain committed in R&D development. So that will give you some idea why we're looking at that, you know, as a continuous effort here.

So can I say that those investments will be the key for you to improve your legacy talking to profitability?

Yes, you can say that. Not only the probability, also the continuous stable high utilization rates.

I understand. So what is the, for the modeling purpose, can you provide some, you know, a target as, you know, for R&D expenses as a percentage of revenue in 2021? Yeah.

Well, I think for 2021 even beyond, our goal is really to keep the OPEX at a similar percentage as the last few years. And same for R&D. Hopefully, our revenue growth will provide more resources to all the related operating expenses items.

Okay, thank you.

And the next question is coming from Stephen Chen, Alicia Capital. Go ahead, please.

Hi, good afternoon, and thank you for taking my question. A couple of questions here. And the first one is accuracy of steel on 200 millimeter. I think one of the other foundries that I mentioned about to acquire or to build a 200 millimeter capacity from good steel, actually the cost increased by probably another 50% in the past two to three years. So I was just wondering, In your thoughts, what kind of a inch or plus a millimeter AST will be justified if you are going to acquire a new FAT or to stop on the greenfield?

Well, this is really hypothetical, so it's difficult for us to answer the hypothetical questions. So let me answer it in a different way. We see potentials to bring value to our current as well as our shareholders if we acquire a similar set like we did for USJC. So that has been bringing value to our customers as well as to our shareholders. So that has been our benchmark for the future acquisition if there's any. we will pretty much follow similar guidance. So the question you raised is really too many factors. For us, I think the ultimate baseline is to see if they can bring value to our shareholders and customers.

Okay, fair enough. Thank you. Another question is, So in Q4, your 28 nanometer revenue was already 18%. So do you have any goal or if there's any four-part number in this year that you think we can provide as a reference?

Well, in Q1, we foresee the 28 nanometer contribution will continue to grow. And the, well, if you're talking about the target, our goal is, you know, we believe that 25% contribution is achievable after our new 20, 28-millimeter capacity come online. So we still align that as our current objective.

Yeah, thank you. That's very helpful. The next question from me is back to 200-millimeter. So we know it is a very busy capacity right now. I'm just wondering, as of this moment, do you still have the luxury or do you still leverage the chance to continue to optimize your product portfolio within 200mm? And if we look at it on the structural basis, let's say in the next one or two years, how do you think this will alter your 200mm AST as well as the profitability?

Well, again, that's the ongoing effort. And along with the productivity improvement and the product mix enhancement, I think that will be the continuing effort for us to improve our 8-inch results and performance. The current 8-inch capacity within UMC is mainly due to the limited cleanroom capacity. availability. So that's why we focus on productivity improvement and some of the bottlenecking efforts. And we also talked about earlier that we will always open to explore viable options in an 8-inch space as well. So those will continue seeking those opportunities. Given the current market, strong market demand, I think the inorganic approach has less possible. So, you know, we have to concentrate and draw our attention to our internal efforts first.

Understood. Thank you very much. That's very helpful. Very good result. Thank you.

Thank you. And next one is from Z. Holden of China Renaissance. Go ahead, please.

Oh, hi, gentlemen, congratulations. My first question is regarding on digitalization. Now, if the company are running at 100% digitalization, I just wonder how much we can overdrive our capacity. So what would be the theoretical peak digitalization we can achieve?

Well, we, you know, for the 2021, we see a very robust demand outlook in 2021. driven by multiple factors in the smartphone related demands the continued momentum the work on phone trends and in addition very hot topic recently there is a strong pickup in automotive segment too right so we believe demand remains very strong the strong demand from those applications obviously will lead to higher utilization rates and so I think we have a pretty good confidence that we were maintaining the high-loading situation. But besides demand, we still need to completely focus on our manufacturing excellence as well as our solution. And in order to continue managing the pipeline of a boat that's 12 inches and 8 inches, and those will help us for the long-term showing stability So, and we, so far we've been executing according to the plan and we're making good progress. We have delivered in 2020 and we still remain very high competency in our 2021 loading situation outlook.

Okay, great. And for this year's capacity expansion, can you share with us how fast you'll be running up the capacity at the quarter?

There will be some increase.

in the uh the second quarter and then there will be some increase in the fourth quarter and but in general the overall percentage of our inch increase is about five percent year over year oh okay great thank you and last one and i think uh for for chief of staff it should be more of the tax rate for for the company and this year yeah because last year the tax rate was actually cut low so i'm not sure if that's how sustainable

Yeah, I think we probably will be safe to model about 10% corporate tax rate for 2021.

Okay, great. Okay, thank you very much. Congratulations.

Thank you.

The next question is coming from Sebastian Ho, CLSA. Go ahead, please.

Thank you for taking my question. The first question is I think there's a lot of talk recently about the OLO chip shortage. which has affected the global car production. And hence, also NIDA reported many governments have approached Taiwan government and TSMC specifically mentioned for causing such shortage. We don't see much mentioned about UMC, but we know that UMC also have some exposure here. So curious about if you can elaborate what's the company's exposure to automotives here, particularly for those power management micro-control unit chips that are severely in shortage right now, and also whether you are seeing a similar situation, i.e. the shortage issues with your major IBM customers here.

Thank you. Well, I mean, we reported last quarter we see a recovery of the automotive market space, and So we definitely see the auto recovery from end of the last year, and the momentum has continued. However, the overall utilization rate of the FAT are very high, for the past three quarters, four quarters already. So despite the fact that UMC's FAT has been operating at 100% utilization rate, we are aware of the inquiry from the auto market and starting from Q4 last year. And we are aware of our position in the auto supply chain as well. And our current plan with that area is we're trying our best effort to help the chip shortage within that supply chain. And we have been doing that starting from beginning of this year.

Okay. So what you said is that you were trying to allocate more capacity or extend capacity to mitigate the shortage impacts for auto-motor customers specifically?

Yeah, it's hard to increase the capacity. It's more of a reprioritize. So prioritizing the automotive market with a bit of a better priority So hopefully we can reduce some of the pressures.

Okay. So does that imply that non-ALTO related applications and customers, if they have not given you long and big enough forecast for the following quarters, that they are likely to, their allocations are likely to get reduced?

I won't say that because some of the capacity increases are coming out from the productivity improvement. For those, the power will probably be allocated to automotive at the current time. But again, automotive recovery really came late in this whole demand surge. It's more of an optimization approach now. And hopefully, you know, by giving some of the higher priority support, we can release the market pressure a little bit. You know, as you know, the overall loading situation, you know, is severely, you know, high. And so we can only do as much as we can.

So our commitment to all the non-auto customers will not change at all.

Okay. Okay, and given that the company has offered some colors about the 8-inch capacity will increase by 1%. Also, there is a challenge to increase legacy 12-inch capacity, which I assume that most of the older chips are using these nodes. It seems like if you are not cutting or lowering the priority to work, cutting or lowering your commitment to the non-auto customers. I just cannot imagine how to mitigate the, how much more extra capacity you can allocate to the auto guys.

Just like Jason mentioned, we will have our own way to managing the priority by keeping the commitment to other customers. So basically, we are doing our best to mitigate the situation.

Okay, great. And the follow-up on that is that given the auto, I think we have already adjusted our wafer price ends and now closer to the market price ends on the 8-inch side. And whether or not this auto chip shortage and auto-guided combinator could be an extra catalyst or factor to enable the company to raise the price or adjust the price higher, not just for the autoguides, but to the non-autoguides also?

The upside and the incremental support will be limited. And so I would say that it's not going to be any significant uptick on that.

Okay, great. Is there a number, or is there a number you can give to us, or a range of the numbers you can give to us about the automotive revenue exposure as a company in total?

No, right now we don't have any automotive contribution, the revenue contribution at this time, and we only cover the three, under the three Cs.

Okay. Okay, that's it. The last question for me, I think you don't probably explain this in the prepared remarks, but I dealt with it later, so allow me to ask again. So what's driving the non-operating investment gain for the past quarter? Thank you.

So for Q4, the net investment gain of $5.7 billion. was mainly correlated to the upward momentum in the equity market. So mostly non-cash-based market valuation.

Okay. Of all the equity holding you have.

Yes.

Okay. Thank you.

Next question is coming from Richie, Taiwan Security. Go ahead, please.

Hi, good evening guys and congratulations for your strong results. I just got one question for my modeling purpose. How much government subsidies do you expect to receive throughout the whole year and how much longer will that sustain?

It should be similar to that of 2020. Continue subsidy recognition should continue all the way to maybe 2023.

Okay. All right. Thank you so much. Yeah, that's all I have. Thanks.

And next we'll have Charlie Chen of Morgan Stanley for questions. Go ahead, please.

Thanks for taking my question. Hi. Good afternoon, gentlemen. So, first of all, we have a lot of discussion about the supply department. You try to reprioritize the auto, you know, to production. Can you give us a kind of timeline, how soon this could be resolved? And I guess, you know, is there any way to judge, you know, how real is the demand? Because even so, it's customers can do to double book. So can you give us some insight about these questions?

Are you referring to the automotive market? We probably won't be able to give you an auto segment outlook, but we can give you an overall.

Yes. So the overall market At this time, the pace of the demand growth has surpassed the rate of capacity increase, as we all know. However, we do look at the... From the inventory side, we do see a declining inventory in the past two quarters, portraying a healthier inventory level, as we think, across the supply chain. So the demand continues to be strong. in both A and 12-inch, and we have confidence in that. And we're constantly checking that at this time. We believe this is some of the changes taking place in the supply and demand dynamics. And again, this could lead to more of a structural shift in the fungi industry. There may be a possibility of that right now.

Okay. Thanks. And maybe some intelligence from supply side, right? I mean, PSMC, the power ship, they claim they can get additional 20K of the energy capacity in their Miao-Yi FAB, right? So why they can't do so and you cannot? And also you have some operation in China, right, the Shaman FAB and Ho Chi Minh FAB. So how do you see the Chinese peers, you know, plan for that supply increase in the long term where they're going to, you know, result in oversupply?

Well, first of all, I mean, we're not in a position to comment on our, you know, peers. And we can only focus on what we do. For UMC, we have a very limited space, clean room space in an 8-inch area. So what we're doing now is we deploy, we're taking our contact and taking advantage of the available clean room space for our 12A and 12X. And for those two facilities, our objective now is to increase capacity to accommodate a growing 28-millimeter wave of demand. And that's why you heard earlier we're talking about we'll focus on 28 nanometer capacity increase in both here in 2021. And that's what we're going to be putting our capacity at.

Okay. So it's more like a clean room issue and you want to try out 28 nanometer. It's not because you cannot acquire inch

Well, first of all, yes, the cleanroom is limited, right? I mean, from Greenfield's standpoint, you know, it doesn't make sense for us to acquire tools if we don't have a place to put them.

Yeah. Okay. Yeah. And also, you mentioned that you tried to, you know, convert some age product to 12-inch. approach to increase the supply. Can you share with us what kind of the semiconductor product you're going to see a massive migration from 8-inch to 12-inch in the coming two years?

Well, they are different applications spread out in different segments. For example, we see the all-around PIDMIC solution, covering from both 8-inch and 12-inch. And we see the RF SOI application migrating from the 8-inch to 12-inch. So there are various applications that continue doing that. But we also see a continued pipeline going into the 8-inch as well. So this is... We just have to continue managing the pipeline, the product pipeline from both 12th and 12th.

Yeah. Okay, that's pretty helpful. And lastly, maybe a question to Qingdong. Can you give us kind of full year, you know, gross margin guidance? And also, the lawsuit with Micron, I know you already settled with the U.S., Justice Department, right? But how about those who are mind-clogging? Are you going to set it with the counterpart? Thank you.

We don't have four-year guidance for gross margin. We do have one quarter, first quarter of gross margin guidance, which is in mid-20s. So hopefully we will take it from there. And also, we don't have any comment. If there's any significant developments We will discuss them accordingly in a timely manner.

May I assume that the gross margin can gradually improve from here? Because the FX impact, so I'm not sure, you know, about FX impact, kind of a one-quarter impact or, you know, assuming that the FX rate that stands for 2Q, would that make an impact on gross margin carry into 2Q? And also the depreciation trend, can you kind of comment on the, you know, core return of depreciation and FX impact and also the positive impact from the, you know, your wafer pricing? So we can kind of get a sense about the four-year gross margin time. Thank you.

The depreciation will go up-down quarter over quarter, and as I mentioned earlier, this year we expect a four-year depreciation to decline by roughly 5%, and next year a little bit more. And so the gross margin guidance, again, unfortunately, I don't have the critical for the policy, so we can only give the current situation for first quarter, which is, again, mid-20s.

Okay, okay. Thank you. Super helpful.

Ladies and gentlemen, we're running out of time, so we'll take it to the last one. And the last question is coming from Randy Abrams, Great Suisse. Go ahead, please.

Okay, thanks for hitting me at the end. I have a few follow-ups. First on the CapEx, we're before you were at $1 billion in underspending, and I think part of that year 28 was in full. With the move to $1.5 billion, Should we expect that's a new range? Like you're growing mid-single digit with about $1.5 billion spend. So is that the framework to go on, or do you even see a scenario that with the focus on 28, it could even start to push a bit higher?

Well, Randy, the first comment I have is our stated ROI-driven type of strategy that did not change. So we'll continue following that principle. So despite the needs, the upside in customer demand and forecast, even with the 28 nanometers, the market situation is not the only consideration that's into our 2021 CapEx budget. Our plan right now is one of focus on maintaining UMC's market relevance and increase the customer's stickiness and base our value proposition, our solutions, and the manufacturing and as well as the critical management capacity offering. This strategy and the principle, it requires to follow a rigorous evaluation process. We continue doing that. We have quite a bit of boundary to do that, to make sure that we deploy the right At this time, it's 1.5 billion, and for the upcoming next year, we'll provide that guidance when we're ready.

Okay, great. If I could ask on the SMIC, it looks like there were a lot of fears three, six months back of restriction of U.S. tools, and now with the latest, they may get access to mature tools. I'm curious from a market dynamic, did you see any accelerated diversification efforts and have those efforts slowed down or reversed?

Well, I mean, first of all, prior to the end of the export restriction, the wave of demand was already very strong. The demand situation would remain strong as we have come to this will last throughout the entire 2021. and driven by many of the demand momentum. So I haven't seen much of a change from that. And even with what the media or any speculation in terms of the approval in the legacy, we can't comment on the competitors or any media speculation. But the way we see it is we believe the spending demand now is to pass the supply. And it's, in our view, this is not related to any development export restriction at all. And so, you know, so I think our competitiveness advantage is going to be on our own capability, you know, and it's not going to be on any top, you know, on the geopolitical or trade dynamics.

Okay. And one other question. I think a quarter ago there was still some underutilization in the Japan path. and also from a little bit lower CIS. Has that loading now picked back up, or is there an opportunity to get some of the automotive customers for that fabric that's not quite full?

Yeah, you have very good memory. Yeah, from our last call, we actually talked about that. We stated the 90-millimeter will be a flaw, and the business will start to recover faster. during the first half of this year. And we are seeing that. And the production rate on some of the wireless communication product will increase our 90 millimeter contribution. And this grant will start towards the end of the Q1 and beginning of Q2. So it's our expectation by Q2, and we'll be fully loaded on this note.

Okay. And one last, just a couple of housekeeping. The non-controlling interest has been moving around, but the expectation on that was partly the Shaman JV partner. And if you could also clarify on OpEx, I think to Bruce's question, would OpEx grow with sales or OpEx would be kind of stable in absolute dollars? I just want to clarify the OpEx trade.

Well, certainly you want to keep it within 13% to 14% of revenue range.

Okay, and then for the non-controlling interest, is there a way to think how that would trend? If you get closer to break-even, that minority interest would come down?

That's right, that's correct.

Okay, great. Okay, no, thanks. That's all my questions, and good job and good luck, Gap, this year.

Sure. Well, thank you for all your questions. That concludes today's Q&A session. I'll turn things over to UMC Head of IR for closing remarks.

Thank you. Thank you, Mr. Lee, and ladies and gentlemen, that concludes our conference for fourth quarter 2020.

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. Goodbye.