Singapore Fab Expansion And 22-Nanometer Capacity Will Drive Progress

Key Takeaways

• Strategic focus on technological differentiation and customer demand for advanced products should drive revenue growth and margin improvement.
  
• Operational efficiency initiatives, such as AI and intelligent manufacturing, aim to control expenses and support recovery in margins.
  
• UMC faces declining profitability due to price adjustments, market losses, supply chain uncertainties, and geopolitical risks impacting revenue and production stability.

Catalysts

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

• UMC is expecting customer demand for 22-nanometer products to increase, driven by applications in OLED display drivers, digital TV, WiFi, and audio codecs, which should contribute positively to future revenue growth.
  
• The inauguration of the new Singapore Phase 3 fab, providing additional 22-nanometer capacity, is expected to support future revenue growth and enhance UMC's geographic diversification, strengthening supply chain resilience.
  
• UMC's strategic focus on technological differentiation, including a 12-nanometer collaboration with U.S. partners, is anticipated to enhance competitive positioning and potentially improve gross margins as these technologies mature.
  
• The company plans to implement cost reduction measures and accelerate the deployment of AI and intelligent manufacturing systems to increase operational efficiency, which should help in controlling expenses and improving net margins.
  
• With the expectation of recovery in Q2 2025 demand and a return to normal capacity, UMC forecasts a gross margin recovery to around 30%, which reflects anticipated improvements in earnings.

United Microelectronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Microelectronics's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.3% today to 19.1% in 3 years time.
• Analysts expect earnings to reach NT$56.8 billion (and earnings per share of NT$4.52) by about April 2028, up from NT$47.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NT$44.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 12.0x today. This future PE is lower than the current PE for the US Semiconductor industry at 21.7x.
• 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 8.88%, as per the Simply Wall St company report.

United Microelectronics Future Earnings Per Share Growth

Risks

• A one-time price adjustment at the beginning of the year led to a decline in wafer revenue, which, along with an ASP (Average Selling Price) decline, could potentially impact future revenue and profitability if these pricing adjustments recur or are not offset by increased sales volume.
  
• Mark-to-market losses from investments due to weakness in the stock market resulted in non-operating income losses, which could affect the company's overall earnings, especially if the market does not recover or worsens.
  
• Despite year-over-year growth in wafer shipments, the company's net income showed a 25% decline from the previous year, suggesting pressure on profit margins and potential difficulties in maintaining or improving earnings.
  
• The potential impacts of global tariffs and trade tensions create uncertainties that could disrupt UMC's supply chain and customer order behaviors, potentially affecting revenue projections if customers pull orders to mitigate tariff impacts or explore alternative sourcing options.
  
• A significant portion of UMC's manufacturing capabilities is in China, posing a risk if geopolitical tensions or export controls escalate, potentially impacting the company's production capacity and affecting revenue associated with its China-based operations.

Valuation

• The analysts have a consensus price target of NT$46.126 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$60.0, 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$297.9 billion, earnings will come to NT$56.8 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of NT$45.1, the analyst price target of NT$46.13 is 2.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.