Expanding Advanced Technology Solutions Will Strengthen Market Position Amid Geopolitical Challenges

Key Takeaways

• Strong demand for specialty technology solutions may boost revenues and market share, with new projects enhancing market position and potential earnings growth.
  
• Strategic manufacturing diversification provides resilience against geopolitical tensions, positioning UMC for revenue stability and competitive advantage in emerging markets.
  
• Oversupply and cost pressures, including depreciation, pricing adjustments, and geopolitical tensions, threaten UMC's profitability despite expansion efforts.

Catalysts

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

• UMC is seeing strong demand for their 22
• and 28-nanometer products, with a record high revenue from their specialty technology solutions, which could lead to increased revenues and market share.
  
• The company is completing a new fab expansion in Singapore and collaborating with Intel on 12-nanometer projects, which are expected to strengthen their market position and potentially boost future earnings.
  
• UMC's efforts in technology development, particularly their leading 22-nanometer display driver solution and strong tape-out momentum, are setting the stage for future revenue growth in advanced technology solutions.
  
• The company's diversified manufacturing footprint is highlighted as a strategic asset amid geopolitical tensions, providing resilience that can attract more customers and enhance revenue stability.
  
• UMC is planning further product migration to 22-nanometer technology and expanding applications such as RF SOI and OLED drivers, positioning themselves for future revenue growth and competitive advantage in emerging technology markets.

United Microelectronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Microelectronics's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.3% today to 19.6% in 3 years time.
• Analysts expect earnings to reach NT$61.5 billion (and earnings per share of NT$4.87) by about December 2027, up from NT$50.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NT$73.3 billion in earnings, and the most bearish expecting NT$52.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 10.6x today. This future PE is lower than the current PE for the US Semiconductor industry at 32.1x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

United Microelectronics Future Earnings Per Share Growth

Risks

• The company's capacity utilization rate is expected to decline in Q4, leading to a lower gross margin forecast of 30%, down from 33.8% in Q3. This is attributed to a lower utilization rate and increased depreciation, which could affect UMC's net margins.
  
• The semiconductor industry is facing an oversupply situation, which is putting pressure on pricing. UMC anticipates another round of pricing adjustments in early 2025, potentially leading to lower revenue or narrower profit margins as they strive to maintain competitiveness.
  
• UMC's ongoing expansion efforts, while enhancing production capabilities, are resulting in increased depreciation expenses. These rising costs, combined with currency fluctuations, are expected to impact gross margins over the next several quarters.
  
• Geopolitical tensions and supply chain resilience efforts have led to a capacity oversupply in the industry. This situation presents a risk to UMC's revenue as customers may negotiate more favorable terms or shift to competitors with diversified manufacturing footprints.
  
• Energy cost increases and other inflationary pressures pose risks to UMC’s cost structure and profitability. Despite aggressive cost management efforts, these headwinds can impact net earnings if not effectively mitigated.

Valuation

• The analysts have a consensus price target of NT$51.81 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$36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$313.6 billion, earnings will come to NT$61.5 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 8.0%.
• Given the current share price of NT$43.0, the analyst's price target of NT$51.81 is 17.0% 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.