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United Microelectronics Corporation (2303 TT): A value semi play

  • Third-largest foundry with 7% market share
  • ASP and margin expansion trend to continue into 2022 as chip shortage persists
  • Strong earnings growth of 67%/11% in 2021-2022F; controlled capex on more mature nodes
  • Initiate coverage with BUY and TP of NT$80.00
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Investment Thesis:

Third largest foundry with 7% market share. United Microelectronics Corporation (UMC) is a Taiwanese pure-play foundry that designs, manufactures and markets Integrated Circuits (ICs) predominantly used for communication, computer, and consumer electronic products.

Focus on more mature nodes.
 While most competitors pivot towards advanced nodes, UMC focuses on mature nodes, particularly 28nm, and is in a great position to take advantage of the demand-supply imbalance for the mature nodes.

ASP and margin expansion to continue.
 Earnings are projected to grow 87%/14% in 2021/2022F, driven by capacity and margin expansion on the back of favorable industry trends – global supply shortages, rapid growth of AI, 5G, IoT and EV, and increase in Integrated Device Manufacturers’ (IDMs) outsourcing.

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Valuation:
We derive a fair value of NT$ 80.00
 and US$15 (5% ADR premium) for UMC based on 0.2SD above mean of 15.5x FY22F PE, which implies a PEG ratio of 0.6. This translates into 3.5x P/BV, which is fair against its ~20% ROE. It also offers a decent dividend yield of ~3%.

Key Risks to Our View:
Change in industry dynamics, IP infringement. 
Global consumer demand, utilization and ASP trends head south; penalties for long-drawn IP infringement dispute in US..