United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2021 first quarter 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 the time if you would like to ask the 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.edu. under the Investor Relations, Investors, Events section. And now I would like to introduce Mr. Michael Ling, Head of Investor Relations at UMC. And Mr. Ling, please begin.

Thank you and welcome to the UMC's conference call for the first quarter of 2021. I am joined by Mr. Jason Wong, the President of UMC, and Mr. Shidong Liu, the CFO of UMC. In a moment, We will hear our CFO present the first quarter financial results, followed by our President's key message to address UMC's focus and the second 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' Financials 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 risks that may be beyond the company's control. For these risks, please refer to UMC's filing with the SEC in the U.S. and the ROC Security Authority. Now, I would like to introduce UMC's CFO, Mr. Chidong Liu, to discuss UMC's first quarter 2021 financial results.

Thank you, Michael. I would like to go through the first quarter of 2021 investor conference presentation material, which can be downloaded from our website. Starting on page 3, the first quarter of 2021, consulting revenue was $47.1 billion NT, with gross margin at 26.5%. The net income attributable to the stockholder of the parent was 10.43 billion NT, and the earnings per ordinary shares were 85% NT dollars. In the first quarter, the capacity utilization rate was 100%. Further improvement from 99% in the previous quarter. And please go to page four. For sequential comparison, Q1 revenue, $47.1 billion, represents about 4% quarter-over growth, which contributed both from ASP increase of 3% plus, as well as wafer shipment, which is also 3% plus. And it was somewhat offset by the stronger NT dollars. Gross profit margin continued to grow to 26.5%, or 12.5%. And operating income margin rate in first quarter was 16.2%, increased by 35.7% sequentially. So the net income as reported was around 0.85 NT per eight years. It's about 0.149 US dollars. Year over year comparison on page five, revenue grew up by 11.4% despite the much stronger NT dollar exchange rate. Gross margin improved by nearly 7% percentage point to 26.5 compared to 19.2 the same period of last year. And operating margin improved to 16.2% from 8.1% in first quarter of 2020. So EPS will show a pretty significant growth from 0.19 in Q1 2020 to 0.85 to this quarter, this past quarter. On page six, our cash is around $107 billion NT dollars. And total Equity is about close to $2.5 billion. Like I mentioned earlier, the QI revenue growth contributing both from AAP growth as well as wafer shipment growth. And on page seven, you can see there's more than 3% uptake in our blended AAP for first quarter of 2021. In terms of revenue breakdown on page 8, Asia continued to grow, and right now it represents about 63% of our total revenue. And Europe and Japan also show mild growth in first quarter of 21. For page 9, IDM view on change around 14%, and on page 10, We see some more balance distribution among three major segments. So consumer now represent about 27% and communication is about 46%. And for page 11, 28 or slash 22 nanometer technology represent about 20%. of our total pipe in Q1 2021. And 40 nanometer represent another 20% for Q1 2021. On page 12 of our capacity breakdown for quarter two, we will see some 4% quarter over quarter capacity growth, mainly coming from 12 inch capacity expansion at both 12A as well as 12X in Xiamen. And on page 13, we revised up our annual CAPEX budget, mainly due to a new project in Tainan, which we will go into details later. And for the new updated CAPEX for 21, it's now 2.3 billion US dollars. So the above is a summary of UMC results for Q1 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 Wong.

Thank you, Shidong. Good evening, everyone. Here I would like to update the first quarter operating results of UMC. To make the semiconductor component shortage, we are working with our customers Suppliers can promise to alleviate the capacity tightness across the supply chain. In Q1, robot wafer demand led to a full utilization in our manufacturing site, bringing overall wafer shipments to 2.37 million a-inch equivalent. For the quarter, our gross profit grew 15.2% quarter-over-quarter to NT $12.49 billion, which probably reflected higher contributions from our 28 nanometers technology. During the first quarter, we continued to see an increase in 28nm wafer shipments, driven by strong wafer demands associated with video TV, data box, and connectivity chips designed into smartphones. As a result, 28nm revenue grew 18% quarter-over-quarter, representing 20% of our rep wafer business. Furthermore, we have started to ship 22nm products to fulfill consumer demands. leading to a recognition of 22 nanometer wafer revenue in first quarter 21. We foresee a significant pickup in 22 nanometer product that will increase our 22, 28 nanometer product pipeline, optimize overall product mix, and enhance UMC boundary share. Looking into the second quarter, market demand will continue to outpace supply, which will lift wafer shimmons and blended AFC in US dollars. Recent market dynamics have provided us and our customers an opportunity to reinforce our CAPAC strategy within the ROI boundary while trying to alleviate the long-term capacity constraint in the supply chain. Therefore, our board of directors have approved an investment plan which will expand the capacity at UMC Fab 12A Phase 6 in Taiwan Tainan Science Park through an innovative win-win partnership model with several leading global customers. The P6 expansion is scheduled for production in the second quarter of 2023, with total investment for the project paramount at $2,100 billion. In addition to UMC's previously announced 2021 CAPEX of US $1.5 billion, the bulk of which is allocated for the equipment for the company's BAP12A P5 site, adjacent to P6. Total UMC investment in the Tainan Science Park will reach approximately NT$150 billion over the next three years. The P6 program is supported by a multi-years product alignment between UMC and the involved customers that includes a loading protection mechanism that will ensure the P6 capacity is maintained at a healthy loading level. We look forward to leveraging our number one worldwide foundry market position in multiple areas such as or late driver IC production, so we may further strengthen UMC's semiconductor industry relevance and capture new market opportunities down the road. Now, let's move on to the second quarter 2021 guidance. Our weight of shipments will increase by 2%. AST in U.S. dollar will increase by 3% to 4%. However, the surging NT dollar headwind may potentially offset benefits on Q2 shipments increase and AST growth. Growth profit margin will challenge 30%. Capacity utilization rate will be at 100%. Our 2021 cash-based cap tax will be budgeted at US 2.3 billion, as Qidong mentioned earlier. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Yes, thank you, President Wang. And 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 a question. If you find that your question has been answered before it is your turn to speak, please press 02 to cancel the question. Thank you. And now please press 01 to ask a question. Thank you. Our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please, Randy.

Okay, yes, thank you. Congratulations on the result and margin improvement. First question, I wanted to ask on the capacity expansion. Could you discuss the amount of capacity for the Fab 12A Phase 5 with the CapEx raise and also how much capacity is planned for Phase 6 with the $100 billion NT plan? And if there's a framework for total CapEx, if you also expect – any spending to continue in China or other facilities? If there's a view that current year's spend may continue around this level for the next couple of years.

So Randy, for P6 alone, the total care tax is around 100 billion NT. And it's likely, the spending is likely to spread out through over the next three years. So starting from later part of this year, bulk of that in 2022, and also nearly one-third in 2023. So that will be the key part of our CAPEX over the next three years. And for the original budget of $1.5 billion, the bulk of that will go to the 10,000 wafer 28 nanometer capacity per month at P5. And that's already ongoing, and we are seeing the contribution earlier, maybe as early as next year. For Xiamen, we are also already reaching to the target, closing to the target level of 25,000 wafer per month. And you recall, it was about 17,000, 18,000 wafer by about the same time last year, but through the extension now it's close to the full capacity right now. So maybe Jason you want to add a few more?

I think the other data point is for the Tainan facility. After the P5 will be about 90,000 wave of capacity total for the Tainan site, the 12A. And by adding the P6 will be on top of the 90K. So we're approaching about 120,000. Okay.

So to clarify, it's 90K to 10K P5. P6 is 20K. So that brings it to 120. Okay. And the second question, it gets back to the mechanism and this new expansion schedule. If If you could talk on how the pricing and margins, as you expand and grow the business with the new capacity, how would that impact relative to your current margins where they're getting to 30%? And if you could give an updated view that the depreciation, where it was originally on that kind of nice downtrend the next two years, but now you'll get more growth, but how does the depreciation profile change?

Well, I mean, without going into specifics about the actual pricing, I can update. First is our discipline, our ROI-driven strategy did not change. So this program would not affect that strategy. Starting in 2023, this program will support our top-line goals, like you said, with multiple years of margin accretion. So this, financially, we believe is justifiable. As we stated earlier in the P6, you know, press release, this P6 expansion will end at second quarter 2023, and in the meantime, the near-term downward depreciation trend remains unchanged. Even post-2023, UMC total depreciation at a percentage of the revenue will be well controlled and managed. Mainly because after a few years of our light cat-hack, depreciation could roll off, together with our gross margin improvement. This effort will happen. will have a strength in our financial position to capture this market opportunity. So I think our customers also recognize positive market structural changes. So they perceive this arrangement is meaningful to them, but also beneficial to them.

Okay. And one last question. The blended pricing, start of the year was, I think, kind of a minimum plus 5%. There's an updated view with ASP up three to four in the second quarter, but also there's a lot of talk in the market. There's further rounds with the capacity tightness. If you could give a view on pricing, and is there an initial view how 2022, if you're already contracting out and may see some movement up on pricing into next year?

We'll continue aligning with our customer. From the recent market dynamics, our forecast for the four-year AFC growth will be in a high single-digit year-over-year now, and it could approach 10%. And, you know, the 10% of the pricing also includes our product mix improvements. And therefore, the current ASD list mainly reflects the value of overall market position, but is more aligning to the market price and market position. So at this point, we see the entire 2021 will be approaching about 10% year-over-year growth on ASD.

Okay. And is there any talk on 2022 yet, or is that normally as scheduled, like in second half? But are you starting early given the constraints?

They are ongoing discussion, as I said earlier. We hopefully we can wrap up not only just the pricing, also capacity support alignment, you know, early, you know, before mid of the year. And so that is still ongoing at this point.

Okay, great. Thanks a lot.

Sure. And the next question is coming from Bruce Liu, Goldman Sachs. Go ahead, please.

Hi, thank you for taking my questions. Can you give us a little bit more color about your innovative business model for the new FAS? Because, you know, I don't really see any details. But the problem from the investor is that when TSMC, who dominated in 28 nanometers global capacity, the chairman is talking about, like, you know, double booking and oversupply in 28, and we are building additional 28 nanometers capacity. How can we ensure that the capacity, the newly added capacity, is fully loaded? You know, what kind of mechanism we can have over it? Because we have seen so many long-term contracts in many, many industries, and a lot of customers just don't honor the contract at the end of the day. So how can we ensure that we can get our desired returns?

That's actually a very good question, and it can be a short answer and a long answer. Let me see if I can maybe start off giving a bit of the background of this position. The recent market dynamics lead to a supply demand imbalance as everyone knows, particularly in the mature nodes. Some of our peers in the market also mentioned about that too. In the past few years, we have seen most of capacity expansion focus on advanced technology. However, the company did not significantly address the mature 12-inch and 8-inch capacity over a period of time due to a challenging market condition. Within those mature 12- and 8-inch nodes, there are many critical components that play the vital roles in the semi-supply chain. Therefore, we believe this event has structurally changed our role and position as a boundary service provider. And I think our customers recognize that. And so at this time, this situation is providing us and our customers an opportunity to work closely. And we have to solve the supply shortage together in this mature mode. So the behavior of this, you know, towards this agreement with the customer is different than just putting a traffic for them. And we call this innovative win-win cooperation model because this arrangement is supported by a multi-years of product alignment. So this is a multiple years agreement between UMC and the customers. And under the alignment, there's also loading protection mechanism. to ensure the capacity to maintain in a healthier loading level. So in other words, this P6 program is well protected with the commitment and obligation from both sides. Now, when you talk about the critical risk, this P6 only accounts about 10 to 15% of our operations. With or without the P6, the rest of the other capacity offering will be more vulnerable to the industry, to the quality. So I think the P6 program itself is set up well protected. Our focus is more on the base of our capacity. And at the end of the day, our goal to protect our base capacity is we have to continue our relentless enhancement in the technology competitiveness. and our manufacturing excellence. And, you know, with a predictable yield stability, our service, and accessible capacity offering. So those are the fundamental solutions to cope with the industry's technical quality. And so the bottom line is I think the P6 program itself is more well-structured, well-protected, but the market up and down, you know, it will happen, but I, you know, from our current academic methodology, based on our best effort, we think the demand for supply imbalance situation with those maternal will stay for some time. You know, the conventional concern of inventory correction or the market up and down probably won't happen within, you know, one to two years. But beyond that, we have to still go back to focus on our fundamentals. So that's sort of our review of this.

But that creates actually a bigger problem. For example, like 28, right, your current capacity is like 50,000 to 60,000 waiters a month. So the additional 20,000 is well-protected in 2023 onwards, but the remaining 50 is not protected. So if the customer is having, like, you know, capacity in both sides, they will fulfill the P6, but they can, you know, cut their orders from the P, you know, the original – previous 50,000 capacity, is that right?

Yeah, I mean, so what I'm saying is from a competitiveness standpoint, whether we have a P6 or P5, we have to deal with the same situation. And in order to protect or compete in that space, our competitiveness is not going to stay in balance. or even people talk about geopolitical, or trade issue, or so on and so forth, our poor competence will result from our focus in our addressable market segment, and which we have been doing for the past few years. Another simple word to put it is we focus on a selective market area, using our addressable market segment, and we deliver comprehensive technology within that segment, and then we start aligning with the customer, and strengthen our portfolio, and as a result, we actually start seeing a market gain on that as well. But we have to continue executing that to protect the baseline. And so I think we march into the direction which we're comfortable, and we feel that we have to stay focused in a select area. We have been executed, and we've become more relevant. So at this point, we think we just have to continue executing that. And the market risk continues. And we don't have to compensate, the market would never happen in this cyclical situation. But you have to prepare yourself to compete in that situation.

I see. Okay, one clarification for the P6 investment. You mentioned that the ROE target, or return driven talk is unchanged. But for me, it's like the current waiver price for the 28 cannot justify the return. How can this P6 return being secure or how can we ensure that it will not be margin diluted for this incremental revenue? Or how can we ensure that the incremental RE is not diluted?

Because the current program has a predetermined pricing for the P6 program. And based on that, the program not only supports the top-line growth, they also support our multi-years and margin accretion.

I see. I see. So this P6 wafer price will be different compared to your, you know, increasing 28 nanometers capacity.

It is different, yes.

I understand that. but can we disclose somehow the price premium?

No, we can't.

It's fine. Thank you, but I'll go back to the queue.

Sure, thank you. And the next question is coming from Goku Hadihalan, JP Morgan. Go ahead, please.

Thanks for taking my question. Firstly, for this new capacity arrangement, Could we talk a little bit about what level of involvement do the customers have? Do you consider any potential co-investment from the customer and any thinking on why you accept co-investment or why you don't accept any co-investment? Just wanted to understand that part. And when you talk about ROI boundary, could we put some numbers around it so that here for us to communicate to investors also in terms of what is kind of like the ROA boundary that is kind of like a hard stop in terms of where UMC will not invest?

Well, first of all, in addition to what was mentioned earlier as a predetermined pricing arrangement for P6, and there's also a guarantee to their commitment by committing to the capacity deposit, as well as the loading protection. So there is a structural mechanism to protect the P6 program. And I kind of highlighted earlier in the background of this current market situation, because the market dynamics, so this this group of customer is willing and recognized the possible structural changes, so they participated with us jointly. So I will say this is a joint program between us and some of the key customers. And so financially, based on that arrangement, we're not affecting UMC's bottom lines and also provides UMC's top line growth. And we have spent, you know, a lot of time discussing this and sharing many of the data, and we both agree, you know, we both agree this is the right thing to do, you know, to solving the shortage issues. And without affecting UMC to discipline the ROI-driven strategies. I can't elaborate more about the specific ROI numbers, but I can tell you, that under our board director's review and our team's review, and we see the bottom line with the margin accretion, and that meets our financial targets. And again, I also mentioned earlier, with the P6 program, the near-term downward depreciation trend remains unchanged, even post-2023 after production stopped ramping. We feel this is a well-structured program for us.

Got it. Understood. One other question. Is there any change in terms of the shipment outlook? I think you did talk about vendor ASP being up maybe about 10% this year compared to previous. I think we're expecting a little bit more. Shipment growth or capacity growth outlook for this year, are we are we still roughly looking at three to five percent capacity growth this year, or is it a little bit better now?

Yeah. That capacity growth is the same for the year, yeah.

Understood. Thank you very much. I'll go back to the queue.

All right. Thank you. And the next one is from Rowan Hsu, Citigroup. Go ahead, please.

First question to Jensen. Jensen, in your prepared remark, you said the first quarter growth profit growth was partially reflected higher contribution from 20 annum meter revenue. So question is, how about the 20 annum meter growth margin compared to the corporate average in first quarter? Are we seeing 20 annum meter growth margin above corporate average already?

We don't give out any breakdown by notes. Okay, so the 28 becomes a meaningful note to us now from both sides, both on the top line and our margin contributions.

If I may, the 28 is actually compared to itself over the past few quarters. So the gross margin of current 28 nanometers is actually much better than the past few quarters.

Okay. Yeah. How about the overall 8-inch and 12-inch gross margin? I think previously you also said the 12-inch gross margin was below the average. Then after this price adjustment, how about your 8-inch and 12-inch gross margin look like?

Price adjustment is really a reflection about market value. It comes from both absolute price increase as well as product mix increase. So it doesn't really change too much about the dynamic between 8-inch and 12-inch. And 8-inch as you can understand that you represent much less, carry much less depreciation. From a accounting point of view, the number always higher than that of 12-inch. But if we're talking about EBITDA margin, then that may not necessarily be the case. So overall, we were happy with the progression that talking to specialist 20 nanometer has improved from a profit margin point of view.

Understood, yeah. And you also talk about that you are starting to ship 22 nanometer product because of our customer's demand. So for this 28 to 22 nanometer migration, How about the margin or profitability change? Is this 22 nanometer? Is it carrying a much higher ASP and carrying a better growth margin than 28 nanometer?

I mean, you know, typically we provide the blended growth margin number without breaking down by detail. So, you know, it's hard to pinpoint on each node. But I also like to add the gross margin is the result, not just the product mix. You know, there's 12-inch weight for shipment contribution, 8-inch pricing, you know, justification, as well as the continuous cost reduction effort and our productivity improvement. So this is more of a blended result on everything, and it's not – just associated with one particular note or fact. So we're happy that we start challenging the 30% in the upcoming quarter. I think given what we have done and we have confidence we'll continue to improve on that too.

Okay, thanks. Last question about me. I think a couple months ago you were comfortable of the total waiver supplies. And have you changed your view recently due to this increasing wafer demand? So are you able to secure enough raw wafer from your suppliers?

We have that issue a while back, and we have been diligently working on that and closely aligned with our supplier and managing the supplier assurance. So we haven't seen any problem right now, so.

Okay, so you have, you know, secure of the wafer. So how about for the wafer price change? Do you see, you know, a meaningful wafer price change, you know, recently?

We see this pricing dynamics, you know, across the supply chain. And I, you know, I can't tell you, you know, what's going to happen tomorrow. But at the current stage, we're based on the alignment with our supplier, we, you know, we're okay with the current pricing structure, yeah.

So do you see the pricing going up or?

You know, I don't have that visibility going up at this point, but I don't know when I change tomorrow or not, yeah.

Okay, okay, okay, understood. Okay, thank you, yeah. Sure.

And the next one is from Zihong China Renaissance. Go ahead, please.

Hi. Good afternoon, gentlemen. I have two questions. The first one regarding the 40-nano strategy, because some of the 20-nano products have plans to go into the 40-nano. So I'm not sure if UMC would start assessing the 40-nano expansion possibility.

Yeah. Yeah, the P6 program, the arrangement with option to migrate into 14, and the possible timeframe will be sometime in 2024. But there's no plan before that.

I see. Gotcha. And regarding the collaborative expansion with the customer, the company has some sort of a loading protection mechanism. So I just wonder how long would that protection cost last in general?

It lasts an entire program.

Okay, all right. Okay, all right. Thank you very much.

And the next question comes from Charlie Chan, Walker Stanley. Go ahead, please.

Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker Stanley. Go ahead, please. Charlie Chan, Walker

No. The answer is no. There's no two consignments from customer. Customer will guarantee their commitment by providing the capacity deposit.

Okay. So it's almost all from your balance sheet?

Yes, it is.

Okay. So with that, do you need to increase the debt ratio or do some fundraising to sponsor the the future CAPEX?

Our current cash on hand is about a little bit more than $100 billion as well, and we just announced this exchangeable bond project, which will likely raise another $600 million for us by disclosing our non-core assets. So I think from a financial standpoint, we even can maintain our current high dividend payout ratio in light of this new P6 project. So there's pretty much no impact on our financial structure.

Okay. Thanks, Qidong. So back to the P6 business, you mentioned that there are several types of demand, including ORE, driver IC, wireless connectivity, set-up of TV, et cetera. So for that kind of... P6 or kind of a long-term demand? Which customer or which product type is a major driver for this P6 or the demand comes from, even if I'm from a current project?

Well, I mean, first of all, all of them are global leading semi-companies, and I can't really name names. And the customer's product and our technology roadmap has been well aligned, and it's also our existing customers. At the same time, those customers, along with their demand outlook, in their addressable market segment, in our view, will outpace the semiconductor industry projection, so it's in a high-growth area. And so we believe this is a more well-positioned program to secure the P6, you know, capacity as well as the future growth, yeah.

Okay, so it seems like the future demand can cross forward from defeating customers, not just a single or a few products. Is that right interpretation?

Yes, it's a multiple customer with multiple products, yes.

Okay, thanks. And then a minor question is about you know, the trend of the inch, some inch project migrate to 12 inch. I'm not sure if that is happening within your fab, but you see that trend of those, for example, large panel driver IC, power IC, sensors, those products used to use the inch as a major foundry source. But going forward, do you think that those may migrate to, like, a 12-inch? And maybe a year or two years later, do you think 12-inch is more efficient for those kind of specialty semi-products?

Well, I mean, every application, you know, the most of it is, you know, migrating from 8-inch to 12-inch due to, like you said, the performance reason or cost of advantage. So there's a continued product pipeline within a different application, including what you mentioned. And we continue to align with the customer on that. We don't observe any 8-inch demand overflow to 12-inch because the overflow, because 8-inch is high. And so we haven't really seen that. But we continue, you know, seeing that on a by application basis. And because the product performance reason, because the cost reason, and they continue migrating to a 12-inch. And even within the 12-inch, they continue migrating into different nodes.

Okay. Okay. Okay. Thanks very much. So I think does that mean that age foundry supply – shouldn't see a structural shortage, I mean, because there's a kind of a alternative, right, to use a 12-inch? Is that the right approach, maybe?

I think the advanced 8-inch has a structural shortage issue. You know, the demand continues, you know, being very strong. However, due to the market challenges on building a greenfield, an 8-inch facility is very difficult. So, you know, we see that come online as, you know, not not as fast as the demand grows. So we, you know, at least for the foreseeable couple years, I think it will remain a challenge. And we're still under structural constraints.

Okay. Yeah, and last question, maybe back to Qidong. So can you help us to understand your gross margin trend into next a few years. I know you don't give a next year margin guidance, right? But just based on measurements, comments just now, it seems to suggest that the P6 would then, you know, dilute your gross margin, even though the capacity is from your own balance sheet, right? So can you help me to understand, you know, what will give you that confidence into you know, next year's gross margin will continue to go up. Is that because of the, you know, further price hike or, you know, the old equipment depreciation going down? Because I feel like now you are running at, you know, 100% utilization already, right? So the benefits, margin benefits from the, you know, higher utilization doesn't seem to be the answer to that. Can you help us to understand? Thank you.

First of all, we didn't say the gross margin will go up sequentially in 2022. We didn't say that. We say the gross margin is a collective effort of cost reduction reflecting the market and also product mix adjustment. So we are doing all of that, and hopefully we can continue to improve our gross margin. But we will keep our gross margin guidance quarter by quarter. And for the P6, it's going to represent about 10 to 15% of overall operation and with a pre-fixed price and with ROI-examined target. So if we plug into our current base, that's the basic assumption to mention that we don't expect this P6 project will dilute our post-margin. And because it's going to be profitable from the very beginning, it's actually going to be adding driving force to our overall ROE performance.

Yeah, so I remember last quarter you gave us some depreciation trend, right?

Yeah, depreciation trend for 2021 and for 2022, we are still looking for somewhat less than 5% annual decline in the full year depreciation expenses. And beyond 2023, when the P6 numbers start to kick in, in the mid of 2023, the number still will be well under control and the trend will not be reversed.

Okay, sorry, I missed that. So one last one is, auto semi production. I mean, how much is the revenue contribution? I'm not sure why you start to disclose that auto semi exposure and I guess the global investors really break into to get your sense about when does the auto semi output will go up from your side and also When do you think the shortage will be?

Well, I mean, the shortage right now is across the board. And we just have to work with our customer closely. And along with the productivity improvements, as well as the new capacity extension. The auto segment itself, you know, we haven't really break it down in our pipe. It's categorized under the others. So right now, the others account about 11% of for our automotive market is within that number.

Okay. Okay. Okay, understood. Thanks very much for your time. Thank you.

Sure. And the next one is from Sunny Lane, UBS. Go ahead, please.

Hi. Thank you for taking my questions, and congratulations for your great results. My first question is also on your P6 expansion. I think you just put out a press release saying that the fascial has been completed, but the mass production will only start from second quarter of 2023. So I wonder if that's because of the equipment supply constraints that we are now seeing in the industry, or is there any possibility that the mass production could actually start earlier than expected?

Well, I mean, we are working with our suppliers, and at this point, we'll foresee there's a lead time for the overall equipment. So we project the, you know, the T6 will ready for potassium on second quarter 2023. You know, that's what we're targeting. But we're still confirming with our suppliers to ensure that that will happen. So that's the current time.

Got it. Maybe a follow-up to your 28 expansion. Since most of your capacity is built several years ago and, therefore, depreciation starts to come down, if we compare the production cost for the new capacity versus your current capacity, I wonder if you could share with us any color in terms of the cost increase?

Let's see. Well, first of all, I don't think there's a cost increase. So once you reach to certain economic scale, the overall cost is actually coming down. So we don't, in building a factory now, compared to what we're building, the capacity six years ago is higher. And it's actually, in fact, it's actually lower. Okay. And we, you know, in terms of the CapEx budget that we presented, we don't generalize, you know, this figure, given that, you know, our P6 program has the flexibility by converting into a 22 nanometer as well as a 14th. That was the earlier question, we completed 14. And the answer is yes. So the entire program has certain flexibility converting into the 14 nanometers. And so we want to make sure that when we plan this, we have that flexibility. And so we can re-generalize this figure to what, six years ago. In general, the current funding cost is lower than what we built six years ago.

Got it. Thank you. That's very helpful. My second question is on the overall supply demand imbalance. And that's now, I think, driving several foundries to accelerate the KPAC for the trailing edge demand. So I just want to get your sense if in the medium term, this could lead to overexpansion or more volatility for the whole industry. Thank you.

Well, I mean, I kind of touched this earlier as well, but once the newly capacity become available, we anticipate a supply imbalance issue will be addressed, okay? But nonetheless, the structural shortage in the mature node we think will remain unchanged until 2023, okay? Given the lead time consideration, okay? Based on our research and study, we don't even, we think there's a good chance they won't have any excess capacity, okay? Probably not likely to happen within the next one to two years, okay? In addition to that, consider the size of lead time, capacity build up lead time, and also the uncertainty of the geopolitical tensions. We have pretty good confidence this time this will probably continue for at least one to two years.

Thank you very much.

The next question comes from Stephen Chang, LH Capital. Go ahead, please.

Hi, thank you for taking my question, and I have two questions here. First is, I'm just wondering, because we see for something like meeting age technology, we don't really see clients have the same product using deal-solving. I'm just wondering if you look at the 28 nanometer now, do you think clients usually use only one boundary for the same product, or for the same product, the client can still use deal-solving? This is my first question.

Oh, this, well, I mean, this is a, this is a several different perspective on this, okay? One is from a customer's perspective. If a customer believes they need a multiple sourcing strategy to ensure their supply, to ensure their supply again, and they have the design resources, you know, I think the customer, is capable to do so, to enable multiple. They perceive, you know, single source enable their supply assurance, and without being able to design efforts, they probably don't need to. So, you know, one perspective is from a customer perspective, from a supply chain. And the farmer's design and the product specific, and that's a different... is a very customized. So they are very hard to have a multiple source. So because the characteristic of the product itself. So you talk about the advanced note, because we don't survey on the very reading edge note. So I can't really give you a comment about UMC specifically. But, you know, I can tell you as a general sense, design into a conventional is very costly. So if you want to enable multiple source, that will be a very, it will be a significant investment. So I think that is one of the important factors here.

Yeah, I understand. So I think the question was actually, if you're common, you just made also apply to 28 nanometer?

If you look at the 28 nanometer, I think most of the products, they'd be able to enable multiple source, as long as the customer wants to do it. There will be some differentiation on the technology side. For UMC, we have a few leading market positions on some of the technology solutions. And for those, I think we're still ahead in the market, so we probably will enjoy better customer stickiness on that.

Understood. Thank you. Another question is that, although just very quickly, so we understood that for the maternal, like 200 millimeter, 300 millimeter, maternal, they are all in supply kindness or shortage now. But if we really need to do a comparison between the two, do you think it is tighter or the bigger shortage in 200 millimeter or in 300 millimeter?

Well, it's a... This is an interesting question. From our view, what we see, they severely aren't constrained, both the 200-millimeter as well as the 300-millimeter. But there's a possibility also the customer is double-booking on that to ensure they be able to secure the supply. So, you know, how is judging the... is very difficult. But I can tell you at this point, I think industry-wise, we are under severe shortage across the board on a mature note.

Yeah, thank you. So just a very quick follow-up on your last comment. So you mentioned about probably due to possible overbooking. Previously, you also mentioned you see the tightness will continue probably for another one to two years. So can we assume when you make a comment regarding supply tightness susceptibility, you already try to exclude the, you already try to consider the possible overbooking?

Oh, absolutely. I mean, this is a planning 101. So, we have to consider that, and we actually, based on our research study, we actually going back all the way to the end market, entire pipeline into the supply chain to analysis that. So, you know, I think that there's a few megatrends in this space driving the demands, you know, from 5G smartphones, the automotive, you know, EV adoptions, as well as the the learn from home, work from home space. And so those demands are real. And if you look at the past years, there's lack of a capex in the matured node space. So structurally, they're just not enough. And so that's why we believe, even with the P6 or even with any announced capacity, a day in a bunch of space, we still believe this, you know, the structural shortage will probably be met.

Yeah, thank you.

Very clear and very good result. Thank you.

Thank you.

Ladies and gentlemen, we're running out of time, so we're taking the last question. And the last one is from Bruce Liu, Goldman Sachs. Go ahead, please.

Okay, thank you for taking my question again. I have a question about the ASP. For the first quarter ASP at the blended base improved by 1.3% only and, you know, which is pretty much driven by like, you know, more 28 nanometers politics improvement. So where is the price hike, you know, the market is talking about? I mean, also for the second quarter, the capacity is going by 4%, but shipment is going by 3%. But I'm assuming that the new capacity addition is mainly for 28 nanometer capacity, which is supposed to have a much bigger, well, much higher ASP. The ASP guidance for second quarter is also like 3%, 4%. only, which is again, pretty much driven by honey egg. So as a light to light based ASP, do we see any improvement?

Well, there's a possibility. Correct. The first quarter ASP growth was actually more than 3%, not one point counting. So as I mentioned, more about Some of that comes from price increase, so less than 3.2%, and some of that comes from product mix improvement. So overall, quarter one SP growth was more than 3%.

I see. What is the Forex assumption in first quarter? Because it's using like, you know.

Forex was 28.3, so there was nearly 2% negative impact on Forex.

I see. I understand that. I understand that. So, for the second quarter, what is the ASP, what is the assumption for the ASP, you know, expansion driven by departmental improvement?

Still similar, I would say both are key factors which contribute nearly 50-50 each. So, we normally don't give the detailed numbers, but you should expect to see similar driving force for this 4% growth for quarter two in AHP.

I see. Okay. Last question. I just did a very quick math for the P6 28 nanometers wafer price. It seems to me that if you want to have a similar return, the wafer price for that 28 has to be like, you know, 50% plus higher than the current market price. You know, that seems too good to be true from my, you know, simple math. So is there anything I'm missing or is that math sounds correct?

I can't really comment on percentage, but there is a predetermined pricing arrangement with the customers. It's actually a very diversified customer portfolio. So, well, I mean, bottom line, the mechanism works. I mean, the mask works. The mask works.

So, my mask works.

So, I can't comment about the percentage of that.

Yeah, it is only one aspect of the total ROI calculation. We also affecting the benefit of economy of scale and also the cost reduction effort and et cetera, et cetera, all the factors our president has mentioned. So, again, it's a collective effort.

I understand. Thank you.

Thank you.

Thank you. And, 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.

Yes, thank you 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 iraumc.com. Have a good day.

Thank you. And ladies and gentlemen, that concludes our conference for first quarter 2021. 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.