Expanding Advanced Packaging And 22Nm Platforms Will Tap Into Growing AI Market

Key Takeaways

• UMC's focus on expanding advanced packaging and differentiating technology is expected to boost revenue through growth in the AI and consumer electronics markets.
  
• Strategic capacity expansions and aggressive cost management are aimed at enhancing structural profitability and supply chain resilience, despite anticipated price declines.
  
• UMC faces profitability and revenue pressures due to declining ASP, underutilized assets, intense competition, reliance on mature nodes, and reduced CapEx.

Catalysts

Operates as a semiconductor wafer foundry in Taiwan, China, Hong Kong, Japan, Korea, the United States, Europe, and internationally.

• UMC is seeing strong customer interest in migrating to their 22-nanometer specialty platform, which is expected to increase revenue contribution starting from 2025 due to its power-saving and performance advantages. This will likely impact revenue growth positively.
  
• The company is actively expanding advanced packaging offerings to enhance AI capabilities, which should drive future revenue growth by tapping into the growing AI market and increasing semiconductor content in various devices.
  
• UMC is progressing key capacity expansion projects, including a new Singapore fab that will enhance supply chain resilience. This expansion could positively impact revenue by increasing production capacity.
  
• Despite a one-time price decline forecasted for Q1 2025, UMC plans to maintain structural profitability through aggressive cost management, which should help stabilize net margins moving forward.
  
• UMC is focusing on differentiating technology offerings, such as the launch of a 22-nanometer high-voltage platform, which is expected to support next-generation consumer electronics. This could positively impact revenue through market share gains in high-growth sectors.

United Microelectronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Microelectronics's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.3% today to 19.0% in 3 years time.
• Analysts expect earnings to reach NT$61.9 billion (and earnings per share of NT$4.89) by about January 2028, up from NT$47.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the US Semiconductor industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

United Microelectronics Future Earnings Per Share Growth

Risks

• UMC's gross margin for Q1 2025 is projected to be over 25%, which is impacted by factors such as the ASP decline, increased depreciation expenses, and one-off pricing adjustments. This suggests potential pressure on profitability. Earnings could be affected.
  
• The company's utilization rate remains relatively low at 70%, with specific segments such as 8-inch loading below average, indicating inefficiencies and potential underutilization of assets, impacting revenue potential.
  
• There is significant competition from other foundries, particularly in China, which can pressure UMC to lower prices, potentially affecting revenue and net margins if cost reductions are not sufficient.
  
• Market reliance on mature process nodes like 28-nanometer, despite advancing in specialty technologies, means UMC may face pricing pressures as competition increases from other suppliers. This can lead to reduced revenues and net margins.
  
• UMC's CapEx budget has decreased to USD 1.8 billion from USD 2.8 billion in 2024, potentially limiting future growth unless carefully managed. This reduction in investment might impact the ability to capitalize on growing sectors like advanced packaging, affecting future earnings.

Valuation

• The analysts have a consensus price target of NT$46.6 for United Microelectronics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$70.0, and the most bearish reporting a price target of just NT$32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$324.8 billion, earnings will come to NT$61.9 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.8%.
• Given the current share price of NT$40.2, the analyst's price target of NT$46.6 is 13.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.