UMC Faces Increasing Pricing Pressure In Competitive Foundry Business

While United Microelectronics (UMC, Hold) faces deep-rooted pricing stress due to competitive nature of foundry business, UMC posted another successful second quarter results which are in-line with consensus expectations. We raise our price target estimate to $2.50 and maintain ‘Hold’ rating.

Revenue came in $1.20 billion, increased by 13 percent successively and growth from sales of $1.07 billion in the same quarter a year ago. Company’s essential foundry segment reported $1.09 billion revenue, and the current business division gained $111 million sales. We see solid rise in demand for outsourced production services for communications chips, with 21 percent revenue expansion successively which is nearly 49 percent of complete foundry sales. Consumer chips accounted 29 percent of foundry revenue, succeeded by computer chips at 18 percent. Rest chips contributed 4 percent foundry business sales.

Gross margin increased to 22.9 percent from 18.6 percent sequentially, due to production capacity usage increased to 90 percent from 81 percent. The company reported an operating margin of 8.1 percent. Management anticipates wafer shipments to increase in the low-single-digit, while mean selling prices will see no change. Accordingly, United Microelectronics can expect revenue growth to mid-single-digits. Increase in mobile devices benefited company indirectly due to large part of the company’s trade is from producing communications chips which are used in smartphones and tablets.

Company has constantly gained low-single-digits gross margins compare to its nearest peer TSM, which has better competency in foundry and ability to maintain better pricing options while leading technology. In our view, United Microelectronics confronts expected headwinds in next quarters, while it shortfalls the economy of scale to gain advantage efficiently next to foremost foundry Taiwan Semiconductor Manufacturing. Company expects revenue to be roughly NT$1.2 billion and net loss likely to be around NT$760 million in new business segment for third quarter.

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Andy Weld, CFA, is an editor and equity analyst for The Downtown Leader. If you have a great story idea for Andy Weld, you can write at [Andy.Weld@downtownleader.com ].

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