United Microelectronics Corporation (“UMC”) – The Investor Weekly Stock Report
UMC continues to grow profit margins and maintains a disciplined CAPEX program. UMC’s focus on lower-end markets enables it to generate stable growth without resorting to more capital-intensive strategies.
Helped by a chip shortage that will last at least another twelve months, UMC will accelerate its growth rate. Strong demand fueled by 5G adoption and digital transformation will continue to drive performance. IoT, EV, and HPC will provide additional market tailwinds for its growth. As the Nasdaq falters, take advantage of the selling by buying UMC stock on weakness.
UMC stock is up 93% over the last 12 months, and the average rating from Wall Street analysts is a Buy. Over the past five years, UMC’s stock price skyrocketed nearly 480%.
Return vs S&P YTD
Financial Overview: October 13 20201
Market Cap: $25.79 billion
Total Debt: $2.72 billion
Cash: $5.37 billion
EV: $23.17 billion
UMC is a leading global semiconductor company. UMC provides high quality IC production with a focus on both logic and specialty technologies to serve every major sector of the electronics industry. UMC’s comprehensive technology and manufacturing solutions include logic/RF, embedded high voltage, embedded flash, RFSOI/BCD and IATF-16949 automotive manufacturing certification for all its manufacturing facilities.
UMC’s comprehensive technology and manufacturing solutions include 28/22/14nm logic/RF, 40/28nm driver IC,55/40/28nm embedded flash, RFSOI/BCD on 8″ & 12″ wafers and IATF-16949 automotive manufacturing certification for all wafer fabs. UMC operates 12 fabs that are located throughout Asia with a maximum capacity of more than 750,000 8-inch equivalent wafers per month. They operate 12 fabs that are strategically located throughout Asia with a maximum capacity of more than 750,000 8-inch equivalent wafers per month.
The company employs approximately 19,500 people worldwide, with offices in Taiwan, China, United States, Europe, Japan, Korea and Singapore.
The company is currently running with a 100% utilization rate. UMC continues to benefit from a favorable sales mix. The top three applications are communication, computer, and consumer.
Communication 47%; Consumer 26%; Computer 17% and Others 10%.
The company is strengthening its offering in markets that have a higher ASP. For example, Radio Frequency silicon-on-insulator (SOI) technology (or RF SOI) and high-v are areas that lift profitability.
Mr. Jason Wang, President of UMC
Mr. Chitung Liu, the CFO of UMC
Market – Capacity Constraints
The foundry market has been tight for some time. Foundries are seeing more demand than they have capacity for in their fabs. In UMC’s case, the utilization rate has been running at 100% throughout 2021. The company has been running at 100% capacity since the end of 4Q2020.
Production in Fab 12A P6 is scheduled to start in Q2 FY2023. The Company will be using Fab 12A P5, instead, which should help increase capacity by 3% year-over-year in FY2021 and another 6% in FY2022. It’s clear that UMC will be limited by the near-term capacity it has available and subsequently the number of wafers starts per month.
To keep growing revenue and earnings, UMC will have to turn to other less straightforward means to do so.
Market – Semiconductors continue to expand during the chip shortage.
Customer demands is leading UMC to focus on 28-nanometer technology. UMC is ramping up the production of larger 28-nanometer chips to meet increased demand for semiconductors at a time of strained supply. The Taiwanese semiconductor firm said it would add capacity for manufacturing an additional 20,000 wafers a month at 28nm at an existing fabrication plant in Tainan.
The announcement will cost the company $2.3 billion, but the deal commits several of UMC’s largest customers to pay deposits upfront and guarantee certain orders at a fixed price.
In 2023, UMC will benefit from further expansion plans. Its new greenfield fab will take more than two years to build.
On the July 28, 2021 Q2 2021 conference call, UMC President Jason Wang said that the Company cannot expect the positive cycle will sustain a 100% back loading. It will widen its competitive edge by minimizing cost growth while ensuring that gross margin remains healthy. UMC is running close to full capacity. As the Company’s expanded capacity meets demand, UMC’s revenue continue to grow.
The Company needs to work with its customer to improve return on investments for its 12-inch material node and 8-inch. For the year, UMC plans to spend 15% of the $2.3 billion on the 8-inch foundry. It will spend 85% of that total on the 12-inch.
* A foundry is a semiconductor manufacturer that makes chips for other companies. Also called “fabs,” semiconductor foundries make most of the chips in the world for hundreds of “fabless” companies that design but do not manufacture, including some of the largest and well-known tech leaders such as Qualcomm, NVIDIA and Apple.
Market – Looking Ahead
The company anticipates demand to stay robust in the third quarter driven by megatrends such as 5G and EV. A shortage of supply is expected to continue, across 8” and 12” facilities. Management expects to see positive margin momentum continue into the third quarter, supported by further product mix optimization, cost reduction efforts and productivity enhancements.
In addition, management expects that the adoption rate of the company’s 22nm technologies will continue to gain traction, reflected by a pickup in customers’ 22nm product tape outs in connectivity and display applications.
UMC is focused on further strengthening its leadership position in a number of specialty technologies such as OLED display driver, RFSOI and imaging applications.
Further, the company continues to take important steps to enhance corporate governance and lead sustainability efforts in its industry. In July 2021, five independent directors were newly elected to the Company’s Board of Directors, representing more than 50% of the board seats and including two female directors. The Company also announced its pledge to reach net zero carbon emissions by 2050, as well as their commitment to work alongside partners to reduce carbon intensiveness and raise renewable energy usage in our supply chain. UMC is dedicated to enhance corporate governance as well as addressing climate change to build a sustainable environment.
Peers – TSM versus UMC
Investors who bought UMC stock instead of Taiwan Semiconductor (TSM) are happy. TSM stock is trading in a range of between $109-125. The September selling in the Nasdaq index sent TSM shares down by over 12% in the last month.
TSMC controlled 52.9% of the pure wafer foundry market in the second quarter of 2021. Samsung ranked second with a 17.3% share, followed by UMC with a 7.3% share.
TSMC manufactures a wide array of chip sizes, but generates about 50% of its revenue from its smallest 5nm and 7nm nodes, as per the company’s most recent quarter. TSMC and Samsung are the only foundries that manufacture 5nm and 7nm chips, but TSMC’s chips have a higher transistor density than Samsung’s. The higher density effectively makes its manufacturing process the most advanced in the world. High-end fabless chipmakers, including Advanced Micro Devices, Apple, and Qualcomm, all outsource their highest-end chips to TSMC.
UMC doesn’t manufacture chips beyond the 14nm node. The company abandoned its efforts to develop smaller chips in 2017 and focused on manufacturing less advanced chips for the automotive and IoT markets instead. UMC noted that developing more advanced chips would be too capital-intensive and that its market opportunity was smaller than its market for older chips.
UMC has the capability to manufacture 14nm chips, but it isn’t generating any meaningful revenue from that higher-end node yet. Instead, it generated 58% of its revenue by manufacturing 65nm, 40nm, 28nm, and 22nm chips last quarter, while the rest came from even older nodes.
UMC’s plants have been operating at maximum capacity this year, but it faces less pressure to aggressively build new plants because other foundries, such as China’s SMIC, manufacture comparable chips for the automotive and IoT markets.
Peers – ON Semiconductor Corporation
ON Semiconductor reported better-than-expected Q2 2021 earnings, helped by capacity constraints driving up market demand, pricing, and internal margin improvement efforts. The recent Analyst Day outlined a credible long-term success story built around above-market growth and improved operating efficiency. Market growth includes focusing on EVs, ADAS, industrial power and imaging.
In 2020, UMC consolidated revenues grew 19.3% year on year to NT$176.8 billion. In 2020, UMC’s gross margin was 22.1% with an operating margin of 12.5%, resulting in an earnings per share of NT$2.42. Overall wafer shipment rose 3% quarter-over-quarter to 2.44 million, 8-inch equivalents. Revenue from 28-nanometer technology continued to grow sequentially. The growth is being led by applications into 4G, 5G smartphones, solid-state drive and digital TV.
Q2 2021 – Results
United Micro reported robust second-quarter results on July 28, doubling earnings to 17 cents a share.
Second Quarter Overview – Q2 2021
Revenue: NT$50.91 billion (US$1.83 billion)
Gross margin: 31.3%; Operating margin: 22.2%
Revenue from 22/28nm: 20%
Capacity utilization rate: 100%+
Net income attributable to shareholders of the parent: NT$11.94 billion (US$429 million)
Earnings per share: NT$0.98; earnings per ADS: US$0.176
Second quarter consolidated revenue was NT$50.91 billion, increasing 8.1% quart-over-quarter from NT$47.10 billion in 1Q21. Compared to a year ago, 2Q21 revenue was up 14.7% year-over-year from NT$44.39 billion in 2Q20. Consolidated gross margin for 2Q21 was 31.3%.
Earnings per ordinary share for the quarter was NT$0.98. Earnings per ADS was US$0.176. The basic weighted average number of outstanding shares in 2Q21 was 12,206,292,756, compared with 12,206,292,756 shares in 1Q21.
UMC grew revenue and earnings at a pace not that different from past quarters, the difference being in how growth came about.
Demand Into 2022
Demand fueled by 5G adoption and digital transformation underpinned the company’s strong performance. UMC’s manufacturing facilities exceeded 100% utilization while overall wafer shipments rose 3.0% quarter-over-quarter to 2.44 million 8-inch equivalents. Revenue from 28nm technologies continued to grow sequentially, fueled by applications incorporated into 4G/5G smartphones, Solid State Drives, and Digital TVs. During the quarter, the company continued product optimization and cost reduction efforts, lifting the gross profit margin.
Management expects the strength of structural demand to sustain and support the continuous improvement of blended ASP. As a result, the Company’s gross profit in the first half of 2021 surged 54.5% YoY to NT$28.40 billion
According to Yahoo Finance, one analyst saw UMC notching a net profit of 13 cents per share while another saw 15 cents vs. 9 cents a year ago. This increase also marked a second quarter in a row of accelerating growth. The top line rose 15% in Q4 2020 and accelerated 19% in Q1 this year.
Goldman added UMC to the conviction list in July. It cited margin expansion through price increases as a reason to buy the stock.
UMC continues to generate strong free cash flow. For Q2, 2021 the company generated $1.16 billion in free cash flow.
CAPEX for 2021 is on pace for $2.3 billion.
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The company continues to deleverage and maintains a high level of liquidity.
UMC – Financial Ratios
UMC tends to distribute 50% of distributable earnings at a minimum. The stock pays a 2.8% dividend yield based on a $10.16 closing price, and 29 cents.
History of Earnings Beats
Q3 2021 expectations are for $0.20 cents a share.
Compound Annual Growth Rates (TTM)
In Q2, UMC posted a gross profit margin of 31.3%, up 480 basis points quarter-over-quarter and 820 basis points year-over-year. Operating margin hit 22.3% in Q2, an increase of 600 basis points quarter-over-quarter and 900 basis points year-over-year.
UMC was able to accomplish this through a combination of higher prices, improved product mix, an increase in wafers shipped and increased manufacturing efficiency through cost reductions. Further, UMC believes it can continue margin expansion.
Management guidance calls for wafer shipments to increase by 1-2% quarter-over-quarter and average selling prices by about 6% in Q3 FY2021. Gross margin is expected to be in the mid-30% range, which would be a material improvement from 21.8% year-over-year.
Average Selling Price (ASP)
Targeted ASP growth will be around 10% to 13% year-over-year. The pricing includes product mix improvement, as well as pricing adjustment. UMC does value long-term partnership over near-term cyclical patches according to management. Beyond 2021, the pricing of the structural demand, management believes, is here to stay. So UMC expects the strength of structural demand momentum will sustain beyond Q4 2021. ASP continues to accelerate roughly 3% in Q1, 5% in Q2 and a project 6% increase in ASP in Q3.
Multiples have come down from where they were earlier this year, as price has tumbled from a high of $12.62 to the mid $10.00s, and earnings have climbed.
UMC still faces capacity constraints that affect its growth, but the latest numbers show there are ways to counter it. Questions continue to linger around the impacts a downturn would have on pricing – other than P6, can the company sustain pricing?
The company has risen nearly fourfold after a July 2020 breakout around $3.00. A cup with handle trading pattern offered an early entry point at $9.92, roughly $0.10 cents above the high in the week ended June 4, 2021.
On July 29, UMC stock broke out with an 8% gain and rallied into the 5% buy zone, which goes up to $10.42 from the $9.92 buy point. Despite a two-week pullback, UMC bullishly held above the key 10-week moving average. For the week ended August 27, the stock rallied nearly 9% to get well extended past the $9.92 breakout point. The stock rose another 11% ahead the next week in active weekly volume.
The stock is now trading near the top of the long consolidation pattern. Shares also have slipped below the rising 10-week moving average again. A strong move off the 10-week line would offer a bullish sign that demand for shares by mutual funds, banks, hedge funds, pension funds and the like remains robust. UMC appears to be building a new base. United’s earnings per share have grown 50%, 350%, 225%, 167%, 400% and 100% vs. year-ago levels in the past six quarters on sales increases of 32%, 30%, 28%, 15%, 19% and 21%.
UMC – YTD Stock Chart
UMC – 3-Month Stock Chart
UMC will continue to utilize price adjustments, an improved product mix, and cost reductions to grow revenue and earnings growth. Although capacity is lacking until the buildout of new facilities, the key for UMC is that demand for foundry services remains strong.
Financial Statements (in millions)
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The Investor Weekly is long United Microelectronics Corporation (“UMC”) either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions, I am not receiving compensation for it, and I have no business relationship with any company whose stock is mentioned in this article.
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