United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2021 third 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 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 has 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 Conference call for the third quarter 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 the fourth quarter 2021 guidance. Once our president and the CFO complete their remarks, there will be a Q&A session. UMC's quality 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 IOC security authorities. Now, I would like to introduce UMC's CFO, Mr. Chi-Dong Liu, to discuss UMC's third quarter 2021 financial result. Thank you, Michael.

I would like to go through the 3Q21-21 investor conference presentation material, which can be downloaded from our website. Starting on page 3, The third quarter of 2021, consolidated revenue was 55.91 billion NT, with gross margin at 36.8. The net income attributable to the stockholders of the parent was 17.46 billion NT, and the earnings per ordinary shares were 1.43 NT dollars. And utilization rate in the third quarter of 2021 was a little bit over 100%. Please turn to page four. So sequential comparison for the income statement. Revenue grew quarter over quarter by 9.8% to 55.9 billion NT. Gross margin rate reached 36.8%, or 20.5 billion NT. And overall operating income is 15.1 billion NT, or 27.1% operating profit margin rate, grew nearly five basis percentage point. For non-operating income, because of the better performance in the equity market, the overall net non-up is around 4.3 billion NT. significantly growth compared to the 1.8 billion in the previous quarter. And the overall net income attributable to the parent is 17.46 billion or 1.43 EPS. And for US ADRs, the earnings per share per ADS is 0.257. First quarter of the year on page five, revenue grow by 17% to $153.9 billion, mainly based on higher wafer shipment, better loadings, as well as higher blended ASP. Gross margin rate is about 31.8%, or $48.9 billion NT. Operating income rate is 22.1%, or $34 billion NT. The net income for the first three quarters of the year is $39.8 billion, and the net income rate is 25.9%. So accumulated EPS for the first three quarters has reached 3.26 NT per share. So page six is our balance sheet. Our current cash on hand is about $113 billion NT after the cash dividend payout. Total equity is about $257 billion. ASB continues to rise on both price increase as well as mixed improvement. And the previous quarter, the third quarter, ASB increase is nearly 8%. On revenue breakdown starting from page 8, Asia represents about 65% of our total revenue, and Japan, Europe, and U.S. remain relatively the same compared to the previous quarter. IDM is about 14%, and Fabulous is about 86%. Communication is around 46% of the total revenue, and consumer is about 27%. Computer stayed about the same at around 17%. And actually, almost every node is running at nearly full capacity. So the change has been minimal from a quarter over quarter basis. 22 nanometers consist of 19% of the total revenue, and 40 nanometers is about 18%. And we'll continue to see some mile capacity growth coming from both 12X in Xiamen as well as 12N in Japan. And for 8-inch, there's some incremental increase from various especially AN in Suzhou in China. So for the time being, the CAPEX budget for 2021 remains unchanged at 2.3 billion US dollars. And majority, 85%, is going to the capacity of 12-inch related expansion. So the above is a summary of UMC's results 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 Wong.

Thank you, Qidong. Good evening, everyone. Here I would like to update the third quarter operating result of UMC. In the third quarter, we continue to experience robots shift demand across computing, consumer and communication, and segments. Higher 12-inch wafer measurements in the quarter reflect ongoing product mix enhancement and partially contribute to the lift in blended ASP. Overall wafer measurements grew 2.6% quarter-over-quarter to 2.5 million 8-inch equivalents. Revenue from 28-nm technologies continued to rise while business engagement in 22-nm have led to a growing number of customer take-outs across wireless, display, and IoT markets, further diversifying our product pipeline. Looking into the fourth quarter, we anticipate wave assurance and ASB 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, productivity, and product mix. The current business cycle provides an optimum 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 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 continues 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 Agency. 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 Award this year, UMC also took the opportunity to reiterate our commitment to achieve net-zero carbon emissions 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 targets. Let's move on to the fourth quarter 2021 guidance. Our wafer shimmers will increase by 1% to 2%. ASP in US dollar will increase by 1% to 2%. Gross profit margin will be in the high 30% range. Capacity utilization rate will be at 100%. Our 2021 cash-based capex will be budgeted at US $2.3 billion. That concludes my comment. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wong. 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 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. First question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Randy Abrams Okay, yes, thank you, and congratulations on the good result. I wanted to ask the first question on capacity. I'm just factoring you're running 100 percent plus. Could you go into timing for the Phase 5 10K capacity, which quarter that capacity would be available? And then for Phase 6, where it's a bigger amount, the 27.5K, Would that all come on at the same time? And would that be beginning of 2023? Just trying to think of timing when the new capacity would come on. And just one follow up on capacity. There were some talks you may consider a further FAB in Singapore or additional capacity. Do you have plans beyond 2023 for additional capacity and see that potential option?

Sure. So the first is for the P5 10K extension, the 28 nanometer, will become online on Q2 2022. And the P6 will be in year of 2023, but in the later year of 2023. And we'll provide more specific, the RAM schedule in a later date, giving the current, the 2D time availability update. The question about the news about the 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 new opportunities as long as we can enhance our shareholders' benefit. And we say that before as well. Our strategy in the discipline tax philosophy from our 2016 has not changed. We always try to drive our sustainable structural profitability based on the discipline, the CapEx principle. So we have aligned with our customer as well as the market to give them our relevance in the marketplace before we're making any CapEx decision. Meanwhile, we consistently cooperating with our customer regarding the long-term development plan. Given our diversified product production side, I think UMC has the luxury to evaluate different expansion options beyond P5 and P6. And we will discuss our expansion plan accordingly once we can deliver that.

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? So is that a level you could sustain? And then the other follow-up was, since the P6 will be later 2023, besides the 10K, how much can you get from de-bottlenecking or other areas? I saw fourth quarter, you have a bit of that. But if you have any other meaningful capacity,

Well, I mean, in 2021, we have continued to focus on the productivity improvement in addition to the incremental capacity. And we will do so for 2022 as well. And so we do expect that effort will continue. And at the current plan, and I think we are targeted greater than 100%, right? But as well, we will guide it as a fully loaded at 100%. but the effort will continue.

Yeah, in terms of capacity growth rate for the 2022, we currently estimate about 6% capacity increase versus 3% capacity increase in 2021.

And on 8-inch, is there any increase, or is that all pretty much 12-inch?

It's pretty much 012 inch now. The de-bottom netting of a product migration will probably continue, but it's still within the same pool.

Okay, great. I want 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 matured node and then also if any chance to reset the 28 nanometer. And 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 doing the wafer shortage. So we kind of position our ASP in the in a more longer-term partnership over the near-term cyclical factors. So we kind of work with the customer to earn their trust and instead of exporting the short-term optimistic profit. And we do believe the pricing will reflect our market value and position. So we foresee the ASP momentum will continue into 2022. At this point, for the 2022, we anticipate the capacity will remain full on both 12-inch and 8-inch. And our 2022 outlook will outpace the foundry industry growth. And overall for the growth will come from the capacity increase, productivity improvement I mentioned earlier, as well as the ASP. And as far as for the 2022 four-year ASP, we'll be able to provide you some guidance in the Q4 2021 conference call.

And just a last question. 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 80s utilization?

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 so as far as for the downturn we we have continuously strengthened the company's competitiveness right and that includes many many areas one is we continue to prepare ourselves for the downturn and because it is a cynical industry and While focused on the structured domain in many megatrends, 5G, EV, and IoT applications, we have aligned it with the key players in our first-tier customer through the technology offering that we have, and so UMC is the sole source. And in addition to that, the CapEx approach we deploy requires some of the risk mitigation with the customer commitments. In addition, We validated customers' confidence in U of C via some of the increasing in long-term agreements for future capacity expansion arrangement. And given 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 micro uncertainty. Therefore, I think the ASP will probably play a less role under such conditions.

Okay, great. Thanks for watching, Chetan.

Sure, thanks.

The next question is from Goku Harihalan of JPMorgan. 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've 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 possibility this era, given that you also feel a little bit more comfortable about managing any potential downturn risks as well. So 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.

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 Q4. mainly due to the validation from our customers on the key markets in capture the structure demands. And giving the value proposition that UMC provide to our customer, including our solutions, sufficient capacity, and the growth path. And I see our goal at this point is we will strike a balance between the profit and long-term growth. and along with our CAPEX, the disciplined CAPEX. We believe our approach will reflect our probability result in the long run. So when you talk about long run, I think that that requires some of the balance act here. So if we look out in the next couple years, and 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 out with the customer, and we believe we'll be able to manage that balance at a healthy level. But as far as the actual number, we probably won't be able to provide it at this time, but I think we'll feel fairly comfortable about our business model going forward.

Yeah, just to add on that, we will provide margin guidance on a quarterly basis. And so for the next quarter conference call, certainly we will give overall outlook for the 2022.

Thanks, Jason and Jidong. So 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. And they are unique and customized to the customer. So it does give you a bit of more stickiness in terms of the customer relationship. In addition to that, there is also a sole source product that we have engaged Combining with the specialty, I think the number will reach up to somewhere at the above 70 range, along with the LTA protection. In terms of overall business model at this point, we have certain confidence that they definitely have increased significantly on the stickiness side.

Okay, just to clarify, so the 50% plus and 70% plus is on the overall capacity, right, for UMC?

Yes, yes, yes.

Okay, yeah, thank you very much. Thank you.

And next we'll have Nick Godoy of UBS. Four questions. Go ahead, please.

Yes, good answer. Thanks for taking my questions. The first one is on your LCA mechanism. If I recall correctly, You mentioned last time that you may start to receive a prepayment from customers in the third quarter 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? And secondly, am I right to confirm that your ramp-up for the Phase 6 expansion is effectively pushed out by 1 to 2 quarters versus what you said last time? And if so, what is the reason? Is that related to the current lead times already at this stage? Or are there any other factors influencing you saying that you don't expect to ramp up more in the latter part of 23 versus Q2? Thank you.

For P6, currently it's 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. And it falls into the ballpark schedule. We have agreed with our P6 partners. And the majority, or if not 100%, of the P6 capacity is covered by this so-called long-term agreement. So it's nearly 100%. or with LTAs.

Great. And in that context, how about prepayments? Is that too early to see them? And if so, when should we start to see prepayments coming through? Thanks.

Part of that is in this year's CAPAC already for down payment. It's a very small percentage. Majority of the payments will come along with the delivery of the tool, which will happen later 2022 and also first half of 2023. So the CAPEX for 2022 and 2023 will see the majority, the bulk of the B6-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 going to 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, then we will be included in their CapEx. And there are some payable as well, but it's not, 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.

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

Thanks. Hi. Good afternoon, gentlemen. So my first question is about what's your observation about the end-demand trend? Because for some specific subsectors like TV, You see a panel price drop a lot, and some consumer MCU market seems to see a weakness, right, if you look at those spot prices, et cetera. So I know your family 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 selected market segments. caused by some of the demand softness. And nevertheless, it did not affect UMC overalls on the supply situation, just like you said. And which we expect this will continue through 2022. I think we haven't seen significant concern on the inventory build-up side. And despite that, there are some inventory increase. At this point, we continue to experience strong demands while some of the mild corrections were immediately replaced by some of the unfulfilled demands given the long queue of the customers.

Okay. And I think Goku just raised a great question, right, about your customer stickiness, right? So is it right that you said that 70% are sticky business meaning some customization specialty with the lta what was that the right number 70 percent yeah i think it's about 70 percent yeah okay great yeah so so my question is that uh how about the rest uh three percent what would be your uh pricing strategy by the way i mean you know uh the company gets a greater credit to identify the price high potential earlier than your industry peers. So I'm curious about your pricing strategy for that rest of 30% business. Pre-assembly is a more commodity, and customers have a dual source. Thank you.

We sort of touched that a little bit earlier. Our current focus is focused on some of the structured demand in the 5G, EV, and IoT applications. We believe those demand will continue, and they're here to stay. So some of the vulnerable ones, and we have some protection, and some of the megatrends associated with demand, and we believe they are here to stay. So giving some of the market focus, as well as what we touched on, the CAPAC risk mitigation approach, along with the LCA. I think we are less vulnerable to this cyclical issue. And so we think the ASP will actually play a less role here. So that's why we actually feel very comfortable at this point. And if the market dynamic does change, we'll provide you with the update.

Okay, that's fair enough. So I guess for some commodity, just to make some example, right, like DriveIC and CU, you know, meaning you see some potential risks, you know, downturns. When you 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, within the driver IEC segments, there's also an OLED driver, which is on the outward momentum. It's a combination, though, and some of it requires some of the risk mitigation mechanism. Some of it actually is more aligned to the growth of the segment. So it's a combination of that, yes.

Okay, thanks. Yeah, and one topic that seems like people care is about the micron, those issues, right? I mean, the, sorry, I mean, you already settled with the U.S. Justice Department, right? But I mean... Six days ago, there was a news report about some ongoing civil lawsuits. Maybe Jidong can give us some updates whether there's going to be some provision or kind of a legal expense on this case. Thank you.

First of all, we don't comment on the news speculation. It's not a complete story. full picture, so we don't comment on that. And also, by law, we cannot comment on the ongoing litigation. And we didn't have any provisions. Based upon our legal effort, we are still working on this case. So it's still ongoing. So that's all we can comment for the time being.

Another word is there is 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, Bo. Jason, I just think about another question. You seem to be very confident that your 2022 will outpass the foundry industry. So is that because you are expanding capacity more aggressively or you are going to higher ASP higher than your peers? Why you have such high confidence you can outpace your foundry peers?

Well, given the current outlook of the 2022, we foresee those structure catalysts will continue to dry including the 5G transformation, you know, the EV and the IoT devices. And those megatrends were still representing significant growth on year-over-year basis. And we do anticipate those structured drivers will continue to fuel our growth, including the OLED driver, the ISP, the Wi-Fi 6, RF switch, MPU, PMIC, And so, and which also lead to a higher silicon content, right? So we are convinced that most of those demand search are here to stay, largely driven by those structured needs. So giving those catalysts, and we have certain confidence. And I mean, in addition to that, based on our efforts and market position, that gave us that confidence that the 2022 will be another strong year for UMC to get market share.

Yeah, but the consensus for TSMC is like next year to grow 15% to 20%. So do you think you can perform similar or even better than this key foundry peer?

Well, our estimate on the foundry industry growth in 2022 At this point, it's about 12%, right? Oh, 12%. I'm sorry. Okay. It's at 12%. Oh, okay.

Yeah. Okay.

And for our business outlook, I think we'll be higher than the current Foundry industry projection.

Okay. And lastly, variable cost. I mean, that is a key reason why Foundry peers want to, you know, hike the price, right? So variable cost, per percentage or per wafer number, so she don't give us some kind of comments about a trend. For example, this year, year over year, what was the growth for the variable cost, and what will 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. So the revenue growth will outpace the operating expenses. As for raw material, like raw wafer and also the labors, they were also on the rise. But altogether, I think we are commenting that because of our production efficiency improvement, our improved economy of scale, and also with good outlook for both demand as well as pricing for 2022, I think there's still further upside for our margins, profit margins.

Got you. Thank you. That's super helpful. Thanks, gentlemen.

Next question is coming from Roland Shi of Citigroup. Go ahead, please.

Hi, good afternoon. So your shaman fed began production from 4Q16. It was still loss-making last year, and I think it is still loss-making now. So with the better pricing, when do you expect shaman fed is going to be turned around? and also how many margin upsides or earning upsides to UMC once the Sharman FAB is breakeven?

Sharman 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 in 2021, and it is expected to be profitable. in 2022. However, it was still below corporate average in terms of profit margin in 2022. And there's still room for Xiamen to catch up to the level of UMC's corporate average.

Understood. Do you have a time frame of when at least some FAB growth 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, Singapore FAB has higher growth margin than corporate average. And Japan FAB is catching up to almost identical to the UMC corporate average. And the Xiamen one is, as I mentioned, coming out of loss making to nearly break even this year. And it will be profitable next year, but still away from the corporate average.

OK. Then how about for our housekeeping point of view, how much can we model this subsidize from your partner in Xiamen? Once next year is happy, you know, going to be profitable.

Okay, say that again.

I think we still have this subsidy from our partner in Xiamen because Xiamen right now is still not making. How about next year? How much will this subsidy we can model in our model?

It will be similar to this year except for the interest expense subsidy, which is already expired. And everything else will be about the same for 2022 compared to 2021.

So we'll be still around $1 billion per quarter?

Yeah.

Okay. Okay, thank you. And my second question is, now, including yourself, a lot of the foundry peers announced a new capacity expansion plans. So in your view, how soon will the industry close the supply and demand gap of 8-inch and the mentioned 12-inch boundary capacity? What are the key bottlenecks 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 about our capacity growth and those new capacity vulnerable or the existing capacity vulnerable or not. So 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. 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 accident will enhance that thickness. We kind of touched that earlier as well. So I think we will minimize the 28-nm vulnerability, even our effort by the customer portfolio, along with our continuous reduction in the break-even utilization rate. So I think, you know, as far as for the UMC relevance, I think we feel comfortable about that. As far as the landscape, the worldwide foundry capacity landscape goes, we will continue monitoring that.

Understood. Okay. My last question is 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 is about 6%. So assuming next year you are going to fully load it of this capacity. So still the growth above 12%, I think that you still need to rely on this ASP increase. So where will you see the ASP increase coming from? Is it mainly coming from this price hike you still will have some product mix improvement this year?

It will be both. And the ASP momentum will be a combination of the product mix improvement as well as the pricing momentum, yes, the price increase, yes.

Yeah, but since like your 3Q, most of the capacity had been fully loaded, so you really did not have too many product needs improvement according to your technology note. So I think this probably will be still the same next year because you guided on your 8-inch and 12-inch capacity will be fully loaded. Yeah, so I expect this, you know, product means improvement probably will be also very limited. So that means for next year, you probably are still going to see more than 6% ASP improvement purely from this price hike. Is that right?

No. I mean, first of all, the 6% is a capacity increase for the year. And that's mainly for the 10K on P5. That will kick in the second quarter of 22. And since the P5 is all contributed as a 28 nanometers, so from a product mix standpoint, it has a lift to the ASP as well. It's really coming out from the new capacity. And 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 blended AST improvement. And we expect we will outpace the foundry projected growth, yes.

Understood. Okay. It's helpful. Thank you.

Next question is from Zihong 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 incremental footprint available in our top eight, the P6. And in addition to those two locations, for our shaman facility, we also have a second phase of footprint available to us. And meanwhile, we continue open to the other new opportunity as well, and giving the current market dynamics. So the future expansion footprint is always on our roadmap that we'll continue monitoring that.

I see. But outside Taiwan, outside China, let's say in Singapore, how much more capacity we can add? Just based on the current capacity, clean space we have.

At this point, Singapore is 100% capacity.

I see. Got you. Yeah. And second question maybe for Chitong, regarding the investment income, actually the company's benefited quite a lot from the investment income for the last couple of quarters. So for modeling purpose, how should we model that line?

Well, it's highly correlated to the stock market performance given our investment portfolio. So I guess it's going to be related to the future performance of the equity market. In the meantime, for the third quarter, we actually received about 770 million NT of dividends from our investees. So third quarter is always the peak season in terms of our dividend collection. So that's adding to the numbers for the third quarter.

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. That one is also dependent on the equity market performance, right?

That's correct, yes.

Okay, all right. Okay, thank you very much. Congratulations on a good result.

Next question is from Brett Simpson of Eritrean 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. But for the high voltage process, if we break down by high voltage process, which representing majority of the display segment, the high voltage representing 30% of our specialty portion, yeah.

Okay, okay, great, thanks. And I know... 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? And we've seen obviously some huge price hikes for some of the customers in display drivers, and some would say these are unsustainably high. So 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 a very good question. And since we have a larger exposure on the high voltage side, so we kind of become more selective. So within the high voltage space, there are also different subcategories. And for those that they have alternative solutions and are more vulnerable to the physical factors, we actually try to minimize those volumes. So we actually more concentrate in the area of the higher growth segment and as well as has a more of an automotive segment, has a longer life, higher qualification requirements. So they tend to have a higher stickiness. So we tend to be more selective within our high voltage space. So that's sort of give us the confidence they'd be able to keep their contractual obligations.

That's very helpful. And 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? And I guess, can you share with us, does the LTAs include, is it wafer capacity guarantees, or is it more pricing guarantees, or both? Under what conditions... are you setting LTAs today, and could these be renegotiated by customers at some point in the future? Thank you.

It's actually pretty complicated, and I will whether or not to elaborate in details, but in general sense, it's really more CapEx related, and then we have a bit of longer-term LTA coverage. And if that's non-CAPEX related, and we have more of the LTA under such called capacity reservation approach. And most of the LTA does have both the pricing and capacity included. So it's a combination of many. And given the condition of the supply and reservation situation, then 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. And 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. But Jason did mention that LTEA plus single source consists more than two-thirds of our overall capacity, and it looks like the LTEA 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. So I think I remember Jason two quarters ago talk about why, you know, age pricing is pretty much fully, you know, reflect your value, but you need to work on the 12 inch. So 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 gross margin still have some gap with the industry leader, even for the fully depreciated age. So 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.

So which one will be? If that has to do with the productivity, when can you nail 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 probability. We did comment about the 8-inch ASP. But usually, typically, we don't give a breakdown on probability of 8-inch. So in our internal data, we actually feel a little bit different. We have a different perspective than what you just commented. So we actually feel fairly comfortable about our 8-inch market positions. I think the gap between us as a blended result compared to the peers. I can't comment on our 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 going to continue to improve our solution competitiveness along with our manufacturing plus 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. And I think we are making good progress, and I think there's still some room, but I think we're fairly close, yes.

I'm sorry, let me clarify, because in the past, when He Jian was trying to lift in China, the gross margin for the A-inch fab was disclosed at demo, at least for the Hergen. That was somewhere around below the industry peer or even below the industry leader. But what Jason just mentioned is that the latest internal data suggested that your A-inch profitability is actually very competitive. Is that a right understanding?

Yes, yes. If you look at our overall A-inch operation, yes.

Understand. OK. So the next question is regarding to the compound semi. I think UMC has a subsidiary for the compound semi. So recently, we do see some stronger than expected demand for that. So can you comment on your strategy for the compound semi? Are you going to expand it? Or what's the key application? What's the target for your compound semi business?

I mean, this is definitely an area, important area for us. And we have devoted to this market. And we have put in our resource and the technology development team on the project. I think the market has significant potential. And at this point, we're still relatively small at the beginning, at the early stage of the business development. But we remain pretty confident about that. Within the compound space, there are different market segments. And at this point, we are in the process of deciding on some of the selected areas that we believe we can be relevant. And once we have concluded that, we'll actually be able to share that with you. We're not going to go all out to address the overall compound, but there will be selected areas that we're going to be focused on. and focus on those areas 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 savings?

Given the compound market outlook, I don't think the capacity is at a critical juncture yet. We have a sufficient capacity to support our current activities, and once the If the demand requires additional capacity, we're definitely aggressively pursuing it.

I understand that. Thank you.

Next one, Frank Lee, HSBC. Go ahead, please.

Thank you, guys. So 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 expanding in other countries. And 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 you 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. China as well. So 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 a semiconductor market, I think many countries or many regions are adopting some incentive plan for building a facility in those locations. We're certainly evaluating those and The key of the building of the Greenfield facility is not only the ROI, it's also the customer engagement. So we are open to customer feedback, and along with our ROI considerations, and we'll definitely make sure that we follow our discipline and capex philosophy. And if there is a decision on a certain location, we'll disclose that accordingly. Yeah.

Okay, thank you. And I have just a follow-up question on, I guess, the CapEx and capital intensity. Based on your CapEx for 2021 of $2.3 billion, it seems to suggest your CapEx to sales is going to rise to about 30% versus 15% last year. As you go forward in the next couple of years, how should we think about this capital intensity? I know you have an LTA for your P6, but just in general – Should we 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. But in a way, we do monitor our profitability structures and our affordability. But more importantly, as Jason mentioned, we also related to customer engagement and our technology differentiation, et cetera. So we want to be a relevant player and customer can stick with UMC for longer term. So all the CAPEX is not really on a pure capital intensity point of view. It's a combination of various reasons.

Okay. But I guess there's no real target that we should look at in terms of what that capital intensity will look like, because I think it's quite a big change in the past year. But going forward, there isn't any explicit target. We should think that.

It 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. But we don't also, just for the sake of spending, if we have money and we just spend it, it's not the case. We really have to protect it by the customer's risk mitigation methodology, as well as the future, longer term. a corporate development plan. So even if we can afford it, we may not do it. It depends on the customer's needs and customer engagement.

So may I add?

OK.

Thanks. So may I add, the capital intensity is more of the after-fact measurements, right? I mean, the condition that we measure on is really if we invest at the right time, at the right place, with the right node, and with the right customers. So if we believe it 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, and then release it. So after the fact, it definitely would be able to come back and measure that intensity issue, but the intensity wasn't the, First-level consideration, yes.

Okay. All right. Thank you very much.

Thank you. And we are taking the last question. The last one, Goku Harihalan of JPMorgan. 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 also? Thank you.

Well, we did observe some of the softness, as we mentioned earlier. But in 2022, despite a lower contribution in waiver 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, 5G, EV, IoT. And those demands remain strong. And we still have a significant unfulfilled demand within those segments. And while we're estimating the growth, the market is at 12%, along with our current alignment with the customer. we think we'd be able to outgrow that. And also, we have tracking the overall inventory situation. We see some rise of inventory, but we also see some of the shortage components. There's some of the longer legs, shorter legs. And we have some triangulate that, along with the end customer and the direct dialogue. that give us the confidence that we're still on the shorter side of the supply side, and so while we are still under the catch-up mode. And it further validated that some of the softness being fulfilled with the unfulfilled demand immediately. And so at this point, we still feel confident about the 2022 outlook. OK.

Thank you very much. Sure. Thanks.

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, 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.usc.com. Have a good day.

Thank you. And ladies and gentlemen, that concludes our conference for third quarter 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. Goodbye.