United Microelectronics Corp

TWSE:2303

Earnings Call Transcript 2022-Q1

[Operator]

Welcome, everyone, to UMCs 2022 First Quarter Earnings Conference Call. [Operator Instructions] And for your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 2 hours after the conference is finished. Please visit our website, www.umc.com, under the Investor Relations, Investors Events section.

And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

[Michael Lin, executive]

Thank you, and welcome to UMCs conference call for the first quarter of 2022. I'm joined by Mr. Jason Wang, the President of UMC and Mr. Qidong Liu, the CFO of UMC. In a moment, we will hear our CFO present the first quarter financial results, followed by our President's key message to address UMCs focus and second quarter 2022 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMCs quarterly financial reports are available at our website, www.umc.com, under the Investor Financial section.

During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the Internet.

Now I would like to introduce UMCs CFO, Mr. Qidong Liu, to discuss UMCs first quarter 2022 financial results.

[Chi-Tung Liu, executive]

Thank you, Michael. I would like to go through the Q1 '22 investor conference presentation material, which can be downloaded or viewed in real time from our website.

Starting on Page 4. The first quarter of 2022, consolidated revenue was TWD 63.42 billion, with gross margin at 43.4%. The net income attributable to the stockholder of the parent was TWD 19.81 billion, and the earnings per ordinary share were TWD 1.61. And in terms of capacity utilization rate, it remains at 100% plus. And for the wafer shipment, it's 2.5 million 8-inch equivalent in Q1 of 2022.

For income statement on a quarterly sequential comparison basis, revenue went up by 7.3%, mainly driven by better ASP and gross margin rate is 43.4% compared to 39.1% in the previous quarter. And operating income, as a result, has reached 35.2% for operating income margin rate or a number of TWD 22.3 billion. The net income is about TWD 20 billion compared to TWD 16 billion in the previous quarter, which is about 25% quarter-over-quarter growth and the EPS is TWD 1.61 per share.

In terms of year-over-year comparison, revenue grew by 35% year-over-year and operating margins grew by nearly 2x to TWD 22.3 billion, and EPS also almost doubled compared to the same period of last year. In terms of our balance sheet, revenue -- cash remained strong at TWD 172 billion, and the total equity is about TWD 300 billion. And as I mentioned, the Q1 catalysts -- one of that is the stronger or better ASP, which continue on the rise.

In terms of revenue breakdown, we see a little change on a sequential basis when U.S. represents 22% of our total revenue and Asia is 64%. And IDM and fabless ratio did not change much. Currently, IDM is about 13% of our revenue and fabless is still remaining 87%.

In terms of segment breakdown, communication still remains our largest segment of 45% revenue and the others, which including auto and industrial is about 12%, and computer and consumer are 17% and 26%, respectively.

And revenue from different geometry, the 40-nanometer and below revenue remained steady around 38%, almost identical to the previous quarter. And we continue to see some capacity increase. For quarter 2 of 2022, we are seeing 10,000 wafer per month additional capacity, mainly in 28-nanometer coming from our Fab 12A. So that will lead to about 4% to 5% of capacity increase in the second quarter of 2022.

After our announcement for the Singapore P3 expansion, our revenue -- our CapEx budget has now increased to USD3.6 billion for 2022, the majority of which is -- 90% of that is 12-inch-related.

The above is the summary of UMCs results for Q1 2022. More details are available in the report, which has been posted on our website.

I will now turn the call over to President of UMC, Mr. Jason Wang.

[Jason Wang, executive]

Well, thank you, Qidong. Good evening, everyone. Here, I would like to share UMCs first quarter highlights. We started 2022 with a solid first quarter, as the strong wafer demand kept our fab operating at full capacity and higher average blended pricing with our overall revenue. While we have observed general end markets tapering a cyclical demand associated with COVID-19 pandemic, UMCs business continue to be well supported by structural trends that are increasing silicon content in devices and driving new applications.

Specialty technologies, such as non-volatile memory, power management, RF-SOI and OLED display drivers are necessary for applications across 5G, AIoT and automotive megatrends. And our strategy to focus on leading specialty technology has been successful, which now contribute more than half of our wafer revenue. An increased number of customers are recognizing the value of our customized specialty process and forming long-term partnership with UMC.

Looking ahead, we expect the positive demand outlook will remain unchanged despite some market volatility caused by the pandemic and geopolitical issues. The expansion at our Fab 12A P5 has come online in this current quarter, which will help us meet excess 28-nanometer demand that we haven't been able to fulfill. We are also actively adding capacity at our overseas bases to support our customers' long-term growth. For our Singapore site, we recently announced a new fab to address growing 22/28-nanometer demand, has already secured multiyear supply agreements from 2024.

Meanwhile, our Japan subsidiary, USJC and DENSO have agreed to collaborate on the production of a power semiconductor at USJCs 300 millimeter fab in order to serve the growing demand in the automotive market. The collaboration demonstrates our strong commitment to supporting our customers amid constraints in the automotive value chain. As a part of the industry megatrends, the accelerating adoption of electric vehicles will serve as a growth catalyst for our automotive business. We are excited to be selected as a foundry partner for many global leading customers as we aim to expand our market share in the fast-growing automotive segment.

Next, I will also like to take a few minutes to share our view on the industry's outlook and where we see UMCs position in the industry going forward. I would like to take this opportunity to reiterate that UMCs growth strategy is aligned with the industry's megatrend. As a leading specialty technology provider, our customized and highly-differentiated solutions across 8-inch and 12-inch will minimize UMCs exposure to market seasonal fluctuations. The specialty technology will enhance customer stickiness [ on plowing ] our long-term business visibility. In addition, the LTAs demonstrate our customers' long-term commitment and endorsement in collaborating with UMC, giving us the confidence to expand our capacity and grow cohesively with our customers and remain resilient during the industry downturn.

As for 28-nanometer, we always align with the customer on 22/28-nanometer new capacity expansion. With the P6 ramp in 2023, the demand/supply balance will depend on the lead time of the 2 and equipment delivery. In light of a recent equipment delay, supply chain disruption, the impact on plowing 28-nanometer capacity coming on stream still remain to be seen. We believe 22/28-nanometer will be a long-lasting node driven by applications such as WiFi 6E, networking and OLED driver IC. We are well positioned with a diversified product portfolio to capture these market opportunities.

Now let's move on to the second quarter 2022 guidance. Our wafer shipment will increase by 4% to 5%. ASP in U.S. dollar will increase by 3% to 4%. Gross profit margin will be approximately 45%. Capacity utilization rate will be at 100%. Our 2022 cash base CapEx will be budgeted at USD3.6 billion.

That concludes my comments. Thank you all for your attention. Now we are ready for questions.

[Operator]

[Operator Instructions] And our first question is coming from Randy Abrams, Credit Suisse.

[Randy Abrams, analyst]

I wanted to ask the first question just about the environment. I wanted to see first, from the China COVID lockdowns, if you've seen any market impact on orders, either from the factory shutdowns or consumption impact. And I'm curious within your application mix, if you've seen cancellation or slowing in certain applications and then shift to other applications and if you're still in a position of unfulfilled demand or you see some applications still with demand, you need to get capacity to meet.

[Jason Wang, executive]

Okay. Well, I mean, the China lockdown certainly have some effect to the market demand. But over all the year, strong demand for auto, industrial, server and networking segments have offset the softness in the smartphone and notebook and the PC to some of the market risk in the -- under the China lockdown. For the overall 2022, it still remains a challenge for us to meet the aggregate demand from our customers. So near term, whether it's demand or inventory fluctuation among the selected customer has not impacted UMC demand/supply imbalance situation.

[Randy Abrams, analyst]

Okay. And I wanted to ask on the CapEx increase. It sounds like tied to Singapore, but that sounds a few years out. If -- are you having to prepay to secure tools quite early? And given the bottlenecks, if you could give an update on timing of when you're bringing up some of the capacity, like the additional phase in Tainan next year, that's still ramping up and how much is ramping up middle of next year?

[Jason Wang, executive]

Well, first, for this year, the P5 has come online this quarter, as we mentioned earlier. For the next phase is our Tainan P6 ramp. Given the challenge in the supply chain, including component and labor shortage, we have encountered the industry by equipment delivery delay. We're currently working diligently with the supplier to identify some of the critical tools and to shuffle the [indiscernible] and minimize the delay. Furthermore, we actually will shuffle internally our 2 installation and qualification schedules. So the bottom line is the goal is through those efforts, we will ensure our LTA commitment to the P6 customer in 2023 remains unchanged.

[Randy Abrams, analyst]

Okay. And if I could just clarify again, so the CapEx raise, what was the factor already to have that increase for the new fab? And you mentioned securing LTA. Does that imply you still expect, even with the way that some of that capacity should ramp second half next year?

[Jason Wang, executive]

Well, I mean, we're managing the P6 ramp, but we will be experiencing some delays. We are aligning that with our base capacity to ensure the customer's commitment to be met. So there are sound dynamics, but we have to continue working that with both supplier and the customer.

[Chi-Tung Liu, executive]

And the increase in CapEx guidance, cash-based CapEx for 2022 is mainly for the share of construction for 12i P3 in Singapore.

[Randy Abrams, analyst]

Okay. And, Qidong, for the overall CapEx framework, is there a rough way to think about next year and the depreciation where you've had a nice tailwind based on the new cash payment schedule? How do you see depreciation this year?

[Chi-Tung Liu, executive]

Similar to that of last year. However, the next year depreciation expense is likely to rise in a more meaningful way. But we will disclose the numbers later this year. But overall, both P3 and P6 are increasing our -- not only absolute profit, but also the EBITDA margin. So there will be some short-term accounting depreciation impact in 2023, but it will quickly go back to a normal range.

[Randy Abrams, analyst]

Okay. And one final question. The LTA, I think last quarter, you mentioned TWD 18 billion for the baseline capacity, I just wanted to inquire a little more the down -- you mentioned in the prepared remarks, downturn resilience. If there were a sharp correction, just how much flexibility -- like, if you're given on shipments for them to push out if they don't have the demand, and then how fixed is the pricing in the downturn? Like have you kind of secured for baseline fixed pricing? Or if you could clarify a little more on the way to think about the LTA in a downturn scenario.

[Jason Wang, executive]

Sure. Well, I mean, in general, the [ back ] on the LTA is to serve the long-term compelling benefit for both customer and UMC. So while we both parties focus on the targeted market to pursue business growth, UMC, along with our customers, share the contractual obligations set forth in the agreement. Given those obligations, both parties have considered the scenarios and factored in all the financial risks outlined in the LTA along with the market fluctuation. So the [ conditions ] set forth on both parties in the LTA will not be deviated regardless of market dynamics.

[Randy Abrams, analyst]

Okay. It won't be deviated. And it sounds like you do expect quantity and pricing then. There's some commitments on those -- in those obligations.

[Jason Wang, executive]

Absolutely. There is a commitment on both volume and pricing, yes.

[Operator]

And next, we'll have Brett Simpson of Arete Research for questions.

[Brett Simpson, analyst]

I wanted to just follow up on Randy's question about LTAs. I think you mentioned TWD 18 billion last quarter. Did UMC sign any new LTAs this quarter? And if so, where is the cumulative LTA amount today? And what's the prospect for signing new LTAs throughout this year? Or is the vast majority of these deals kind of in the rearview mirror now?

[Jason Wang, executive]

Well, LTA is a mechanism to give us the longer-term visibility. And so, yes, the LTA is a mechanism we'll continue to deploy throughout this year. And in fact, we -- actually, there is multiple LTAs still under discussion currently. We do see this LTA serve us, as I mentioned, as a long term for compelling benefit for both customers and ourselves. So we'll continue to deploy that, yes. And there's still some ongoing ones, and we expect that number will continue going up. And in fact, the DENSO announcement we just did actually is part of the LTA as well.

[Brett Simpson, analyst]

Okay. That's helpful. And maybe just as a second question, I guess, we've seen a sharp increase in your gross margins over the last couple of years. And I understand LTAs give you protection around the cycle, around market changes and market conditions. But can you share with us your thinking about how gross margins trend through the cycle for UMC? If we look at the sort of puts and takes of the cycle, where would you expect gross margins to sort of settle in long-term for UMC, given all the dynamics we've seen of late?

[Jason Wang, executive]

Well, I really -- maybe Qidong can comment that. But if I can give you a bit of a background on this, the way we look at this gross margin in the long term, is the way that we -- throughout these past few years, we have transformed the company to resilient and it's well positioned to weather through the market fluctuation through a few things. One is the CapEx strategy via a stringent ROI-driven criteria, and backed with the customer's LTA commitment. The second is we have continued to closely collaborate with the global leading customers to help optimize our client portfolio.

And third is we continue to grow our specialty technology business, which contains higher differentiation and customize the process solution, which then will provide a longer visibility and stickiness. And fourth, the company will have more room to grow EBITDA margin via product mix refinement. And the last is the company is healthier financially now, the structure that includes a much improved breakeven point. All this, I think, will contribute to allow UMC to weather through the semiconductor cyclicality. So that means the margin will stay at a healthy level. And that's on a higher level, how we manage this margin going forward, yes.

[Operator]

Next question is from Bruce Lu, of Goldman Sachs.

[Zheng Lu, analyst]

Congratulations for the great results. I want to ask like for the -- moving to the second quarter, I mean, the gross margin is guiding for 45%, which is up from like 40% last year comparing the guidance to guidance. And even if we exclude the ForEx impact, you still see a major -- massive margin improvement. But the only differences between [ second ] quarter and the first quarter is P5, which is mostly 28-nanometer. Can we assume that your 28-nanometer profitability is already higher than the corporate average?

[Chi-Tung Liu, executive]

No, I think 28-nanometer margin is in line with our 12-inch operation. And that's from an accounting statement point of view. Of course, EBITDA margin, [ Tainan ] may have the best EBITDA margin internally. And I have to emphasize that Q1 guidance of 40% is somewhat lifted by this unexpected weaker NT. And for quarter 2, we are already factoring this weaker NT scenario. And there are certain headwinds in quarter 2 as well, mainly coming from rising raw material costs and the increased labor costs, which are pretty much evened out by this better ASP factor in the second quarter. So 45%, roughly, gross margin is the best estimate we can see for now for second quarter.

[Zheng Lu, analyst]

I think the next question is that the investor concern is mostly the end demand deterioration. Jason, can you provide us like how much of your business right now is pretty much like single source [indiscernible] or like customized process? What is the revenue contribution from those business, which is more difficult to smooth away even when you see the downcycle?

[Jason Wang, executive]

All right. So well, let me put it this way. For the -- for our overall product mix, the specialty technology considers a single source and customized product that's probably representing more than 50% of our current revenue now. And that is continued increase, at the current quarter, with about over 50%. And the -- from the LTA arrangement for the 28-nanometer, particularly, the coverage is about 80%, okay? And the -- in addition to those, from the non-specialty technology, as a single source, that also has a good percentage of that in there. So net-net, I would say, we have about 65% we consider as a single source and specialty technology. So that will probably give you some ideas. And in addition to that, we also have -- over that, LTA coverage.

[Zheng Lu, analyst]

Do you have a target for 2 years?

[Jason Wang, executive]

I think the number will continue to increase. Our specialty technology and the customer engagement momentum remains strong and robust. I think the number will continue to rise. And while we continue that progress, we can update that on an ongoing basis.

[Zheng Lu, analyst]

I see. I think I want to squeeze one question for the R&D expenses, which is below 5% -- 5% of the revenue in first quarter already. Is that a new norm for the UMC? I think we discussed this 2 or 3 years ago, but now it's getting to the level of 5%. Is that a new norm for UMC moving forward?

[Jason Wang, executive]

Given the current near-term projection, we will stay in a similar level, while our revenue continue to grow. And meanwhile, we'll continue developing in a different -- various technology in the specialty area. But I think we'll still be within that ballpark, yes.

[Operator]

Next one, Charlie Chan, Morgan Stanley.

[Charlie Chan, analyst]

So my first question is about the -- your LTA or contract with customers. Because right now, you see that some consumer or PC, smartphone customer, their inventory keeps going higher. So would you allow customers to trim or cut some forecast even if they have some contract with you?

[Jason Wang, executive]

Well, I mean, the customer forecast changes, but the contractual obligation stays. We sort of touched that earlier, the conditions set forth in the LTA will not deviate, regardless of the market dynamics.

[Charlie Chan, analyst]

Yes. So that is my concern, right, because you want the customer to keep that obligation and their inventory keeps going higher. But the problem is that those inventory cannot really step through to the end market, given the market situation.

[Jason Wang, executive]

That's not entirely correct. So if a customer is taking a position to reduce the loading, as long as they fulfill their contractual financial obligation, that is another alternative.

[Charlie Chan, analyst]

Yes. But if there is any kind of penalty, would that force customers to keep producing?

[Jason Wang, executive]

Well, there are certainly some contractual obligation financially. So -- and I -- it's our belief, both parties have considered those scenario while we enter into that agreement.

[Charlie Chan, analyst]

Okay. Okay. And also, I kind of agree that some subsegments are still pretty robust, like automotive, networking, cloud, as you mentioned. But I think that UMCs real revenue exposure to those so-called resilient segments is quite low, right? I don't think that the aggregate exceeds that 20% of revenue. Would you agree with that?

[Jason Wang, executive]

I didn't catch the last statement, again. I'm sorry.

[Charlie Chan, analyst]

Yes. So those exposure to automotive, networking, cloud together, your revenue exposure shouldn't be more than 20% in my understanding. Is that right?

[Jason Wang, executive]

No. It's actually higher than 20%. I will say we will -- probably 1/3 of that is already within the automotive, industrial, and there's -- the other area, even within the PC, networking, the way that we category that, the part of that is actually belong to networking, which has a much stronger demand. So -- because if you go into each subcategory, including a PC notebook and then you have to segregate by different applications again, and so they are some of the strongest segments on the sub category. This is some of the weaker one. So the exposure wasn't exactly on a very higher service level, yes.

[Charlie Chan, analyst]

Okay. So yes, so that's a data very, very helpful. I think all of those try to get a sense, first of all, your current fab utilization or next quarter fab utilization would really reflect the consumer tech inventory correction. And whether UMC has sufficient backlog from industrial, automotive and networking to offset that business. And I think those are really pretty helpful.

[Jason Wang, executive]

So maybe I can give you another example, for instance, on the smartphone space. We're more exposed to the 5G phone in the OLED space on a high voltage. This is the TDDI because we don't do much of the TDDI in the smartphone area. But we do quite a bit of automotive in the TDDI display. [ TDDI ] with high voltage, there's a mix of applications within there. So the mix is quite different, yes.

[Charlie Chan, analyst]

Yes, and lastly, is there any concern that, given you have the LTA is like 2 ways, right, you have to deliver customers who need to stick with the order for P6, right, if there is any kind of schedule delay, would you need to pay a penalty to your customer?

[Jason Wang, executive]

Well, again, there is mutual contractual obligations. And so we both calculated that, and we have considered all the scenario and factored into that. So at this point, our -- from UMCs perspective, our goal is to ensure our commitment to be met.

[Charlie Chan, analyst]

I see. I see. So you want to put the customers' demand as the first priority, right? And -- okay. I get that. In which tool you're seeing the biggest shortage, I mean, the bottleneck for entire production line?

[Jason Wang, executive]

Well, that's quite a bit of detail there. [indiscernible]

[Operator]

Next question, Gokul Hariharan, J.P. Morgan.

[Gokul Hariharan, analyst]

First of all, on LTA, Jason or Qidong, could you remind us how much of your 12-inch capacity and 8-inch capacity is now covered by LTA? I guess, Phase 5 and Phase 6 -- P5 and P6 will probably be 100% covered, but for the existing capacity, could we have a reminder on how much is covered by LTA?

[Chi-Tung Liu, executive]

We don't break down by 12-inch and 8-inch. But obviously, all the newly built capacity or the new capacity coming on stream, as we mentioned, P6 in Tainan and P3 in Singapore, are all covered by multiyear LTAs. So all the new capacity, 100%. And the new DENSO project is covered by LTA. And I think the overall ratio, I think, as Jason mentioned, the overall business covered by LTA is close to 30%, 40%.

[Gokul Hariharan, analyst]

Understood. So let me ask -- I think you mentioned that you saw some demand weakness in some of the cyclical areas related to pandemic shutdown or lockdown, et cetera. Could you talk a little bit about what are the customer conversations you're having in these areas? Is your backlog reducing as a result? Is there still a lot of nonsupported demand for these segments that you still can't fulfill? Is that nonsupported demand coming down? Just wanted to understand what are the dynamics that are happening between you and the customers, given some of this end demand weakness?

[Jason Wang, executive]

Well, in general, we remain challenged for us to meet the aggregated demands from our customers. So we're still severely undersupplied to our customers. But mainly, if you break it down by different segments, the PC notebook and the smartphone area has shown some of the softness, while the automotive and industrial, server, networking are still escalating with the shortage. So I think the -- at this point, I feel the demand remains at fairly high level to us -- okay, for us.

And the conversation with some of the customers is we are diligently mitigate or modulating some of the soft area, hopefully, that given the higher inventory or the softer demand, if we can modulate those capacity to support those on the severe shortage segment. So that is ongoing process and effort's on that.

[Gokul Hariharan, analyst]

Okay. Understood. The second -- the last question is on your 2Q wafer price increase. I think you talked about roughly 3% to 4% increase in wafer ASP on a U.S. dollar basis. Is that primarily coming from your increased 28-nanometer mix? Or are you still seeing wafer price increases to customers, given the unfulfilled demand?

[Jason Wang, executive]

It has both the results of both pricing increase as well as the better product mix.

[Gokul Hariharan, analyst]

Okay. Okay. One last question. This DENSO JV on IGBT, congratulations on that. Could you talk a little bit about what kind of capacity of UMC Japan would you be allocating for that? Is there any details in terms of the plans for this?

[Jason Wang, executive]

Sure. Under the program, UMC, we, through USJC will provide 12-inch IGBT manufacturing service to DENSO. The program is, while the DENSO will bear the CapEx for the tools and USJC will bear the CapEx for clean room and facilities. And the production ramp for DENSO will start in 2023, and the targeted capacity ramp will reach 10,000 per month by 2025.

[Operator]

Next question, Sunny Lin of UBS.

[Sunny Lin, analyst]

Jason, Qidong, congrats on the steady performance. My first question is also to follow up on LTA. So I wonder, does your LTA engagement could sort of limit your possibility to push out the capacity expansion if customers continue to pursue the demand?

[Chi-Tung Liu, executive]

It's a contractual obligation, including the timing. So we are managing the equipment delay. So we are doing our best effort to fulfill our contractual obligation not to impact our commitment to all the LTA customers. So the timing is fixed.

[Sunny Lin, analyst]

Got it. And so maybe a broader question or a high-level question. On the January earnings call, you shared your thoughts on the supply-demand outlook for overall [ tooling ] at foundry for the next couple of years. Now after a quarter, lots of changes on the demand and also on the supply side, so I wonder if you could share with us your latest thought on the supply/demand outlook?

[Jason Wang, executive]

Well, I mean, for 2022, I think we remain -- our view on 2022 remains solid. The -- in Q1, I think we gave -- we revised up. The foundry industry growth will be about 20% and plus. That view has remained unchanged. And UMCs target to grow in line or higher than that foundry industry, I think that is also firm. For 2023, if we look into the outlook, we remain cautiously optimistic on the market demand. The overall mix trend that UMC is focused on, I think that, that will continue to grow. But, given the current market situation, we -- now we are more cautiously optimistic on that. Over the past few years, through the proactive market positioning and closely working with our -- the overall global leading customers with our ROI-driven CapEx, and I think all these efforts will help us to enhance our position financially, and we'll continue to enhance the company profit even with this market dynamics. So we -- at this point, we -- for the 2023, we are cautiously optimistic about it.

[Sunny Lin, analyst]

Understood. That's very helpful. So any expectation on the industry-wide supply/demand going to 2023 and [ 2024 ]?

[Jason Wang, executive]

Well, I mean, we touched that earlier as well. Given the challenge in the supply chain, including all the shortage, whether on component or labors, there will be some equipment delays. And I think some of the announced capacity may not come online on time. But the -- so I think the -- right now, instead of commenting about the overall market in the 2023 in terms of supply and demand, we feel comfortable about our situation. And given what I just mentioned earlier, given what we have changed in these few years, along with our targeted market, the market megatrends, along with the customer alignment and we feel comfortable about our 2023, regardless of the supply dynamics.

[Sunny Lin, analyst]

Got it. My another question is on pricing. I think on January -- in January, you guided that for 2022 pricing to go up by about 18 percentage on a blended basis. But if based on second quarter guidance, that may imply a limited upside into second half. Would that be a fair assumption?

[Jason Wang, executive]

Well, we guided that. And based on the margin ASP expansion in both Q1 and Q2, we are promisingly approaching our annual target right now.

[Sunny Lin, analyst]

Got it. So no further update on the full year pricing guidance? Should we anticipate a bit of upside in the second half?

[Jason Wang, executive]

No, we'll probably do that on an ongoing basis -- on a quarterly basis, yes.

[Operator]

Next question, Szeho Ng of China Renaissance.

[Szeho Ng, analyst]

I have 2 questions. The first one, in DENSO, we agreed to have 3 fabs running the 22/28-nano. Just wonder how we are going to allocate the capacity. Would that be based on customer or based on technology platform or based on the region or countries, the products that's being shipped?

[Jason Wang, executive]

Well, there are multiple considerations and there's not a simple answer to that. The -- not only from a customer alignment standpoint, we also have to think about each site's economic scales. So we don't want to run the product too fragmented in each site. So we're carefully examining the -- our capacity profile as well as the customer demand and to align that. And so it's quite dynamic, complicated, but it's sophisticated. So I actually don't have a simple answer to that, but I can assure you, it's very, very sophisticated process.

[Szeho Ng, analyst]

I see, I see, good. So can we assume that basically the 3 sites can basically support one another, then the capacity can be fungible?

[Jason Wang, executive]

Ideally, they are fungible. But again, the higher flexibility or fungibility, that will actually increase the cost of operating it. So you have to seek a good balance of that. And the -- while you mitigate the demand risk, and you have also achieving a better financial results. So it is about that.

[Szeho Ng, analyst]

Okay. Fair enough. Second question, equipment delay, I think it's pretty much well known in the market. But would you consider, let's say, the mature photo mask and other area of concern that may limit the final wafer output?

[Jason Wang, executive]

Well, I mean, yes, I mean, the answer is yes. It's actually a lot more than that. So we're constantly working on productivity improvements from both base capacity as well as the new capacity and accelerating the ramp-up. So there are multiple efforts and activities. And meanwhile, we're working with the 2 suppliers to shuffle in the [indiscernible] and some of the different critical tools to minimize that as well. So it is quite a bit of efforts there, yes.

[Operator]

Next question, Nicolas Baratte, Macquarie.

[Nicolas Guy Gabriel Baratte, analyst]

Could you give us an idea or a range of capacity increase by end of 2020 to end of 2023? So what I mean is, I understand there is equipment delivery uncertainty. I understand there is matching with customer capacity schedule. But if we think about P6 and P3, let's say that in both those fabs, you're going to add 30,000 wafer in each, right? So 2 times 30,000 right? So when do you think reasonably the time frame when we see those 30,000 in production? You've mentioned previously for P6 beginning of revenue in 2Q '23. So is it still the case? And then for P3, what could [ this be ]?

[Jason Wang, executive]

Well, I mean, we kind of touched that for that last answer to address that ramp-up schedule for the 2023 P6. And the original plan is try to have an initial production in Q2 2023. And towards the end of the year, we can reach to a higher -- the full capacity. And so that profile is still under alignment with the supplier. And our goal, based on those assumptions and the support that we have aligned with our customers is also under evaluation. So we continue moving to that same direction. However, I think the priority at this point is to ensure our customers' commitment first, yes.

[Chi-Tung Liu, executive]

For 2022, capacity increase is rather firm. We are talking about [indiscernible] year-over-year increase, which increased by 8% in 12-inch and [ 4% ] in 8-inch. And our 28-nanometer capacity in 2022 will increase about 20% year-over-year. So because the P5 additional 10,000 wafer is coming online as we speak, so this is a more [indiscernible] for this year.

[Nicolas Guy Gabriel Baratte, analyst]

Understood. Last -- second and last for me is, I understand that the product mix can be difficult to quantify. So what you said the last, PC notebooks, smartphone weakness, I guess, it's what everybody is saying. I also guess that it really depends on customer-specific, client-specific. But when you look at your 20% revenue growth, 20-plus percent revenue growth, I'm sure you have smartphone, PC model that could indicate some downside to that 20%? What do you think is the range?

[Jason Wang, executive]

So can you -- if I can recap your question, your question is, given our current forecast, what do we see about the decrease of the PC demand related to PC notebook?

[Nicolas Guy Gabriel Baratte, analyst]

What I mean is you said you feel pretty confident to have 20-plus percent revenue growth this year. And then you said smartphone demand is weak but because you make more 5G, OLED and 4G TDDI, the impact for you, actually, I guess you mean it's not that big. But in as much as OLED and 5G, volumes are growing. So I understand that. Nevertheless, I suspect there is some disconnect between a lot of the semiconductor expectation and a very poor consumer spending data or macroeconomic data that most of us are seeing in terms of COVID lockdown in China, inflation in Europe and the U.S. and so forth, which are reaching especially the consumer inflation in some parts of the world is extremely high. So do you have a range around this 20% revenue growth?

[Chi-Tung Liu, executive]

First of all, yes, we didn't really say 20%. We were talking about [indiscernible] capacity increase and coupled with the mid-teen ASP growth. So yes, of course, that according to calculation should be about 20%. And our President just mentioned, we still cannot fulfill our aggregate demand. There are still some areas that are showing very strong demand for our capacity. But we've been able to fulfill any of the fluctuations for now.

[Operator]

Next question, Frank Lee of HSBC.

[Frank Lee, analyst]

Sorry, I just wanted to follow up on, I guess, that 20% -- implied 20% growth. I think one of your foundry competitors have already talked about a similar type of growth for them this -- or they're going to exceed that. But they've kept the overall industry growth of foundry relatively unchanged. And given their market share and given you're also sort of maintaining your forecast for the full year to be relatively unchanged, does that imply there is more share gain that you're expecting this year, I mean, relatively speaking? Because unless the overall industry growth actually is going to be expected to increase -- I know you guys never gave an explicit industry growth, but just trying to understand, I guess, the numbers that we're seeing right now. And what is that -- is it more implied share gains that you expect this year?

[Jason Wang, executive]

Well, you're right. Here what we have implied, that our target is to grow in line or higher than the foundry industry. So that is, yes, it is a share again, yes, that is aligned to our target.

[Frank Lee, analyst]

Okay. All right. And then I guess the other thing I wanted to -- second question I have is, I think you had mentioned in the past that 28-nano node potentially can be a little softer into next year in the past -- previous analyst meetings. Is that still a view that is being shared right now by management? Or is there any change to that?

[Jason Wang, executive]

Well, I think our past message was that we believe the 28 will be a sweet spot for many applications as well as some of the new products, which will migrate to 28. So we do believe 28 demand will continue to grow. And our strong 28 product pipeline, we have aligned with our technology, with the industry's megatrend. And along with the endorsement from the global leading customer on the LTA, we have confidence that our 28-nanometer capacity expansion are well protected. And so we -- I think we actually feel pretty comfortable with that, yes.

[Frank Lee, analyst]

Okay. So it's more of a -- sorry, just a follow-up there, the protection is more company-specific on 28 because of your product mix and in terms of your agreements. And that's the relative comfort you have.

[Jason Wang, executive]

Yes. As long -- as well as the focus on the market that we're addressing, that we believe are linked to the megatrend, yes.

[Operator]

And ladies and gentlemen, we are running out of time, so we're taking the last question. And the last question would be Patrick Chen of CLSA.

[Patrick Chen, analyst]

Can you talk a bit about this DENSO partnership? Aside from the fact that they are based in Japan and the 12-inch is what you have in Japan, what are the key differences of producing this IGBT 12-inch instead of 8-inch? What are the benefit and challenges? That's number one. And number 2, can you talk about the first quarter noncomponent? What is the main contributor to the 1Q non-op? These are my 2 questions.

[Jason Wang, executive]

Sure. For the first question, the -- yes, the program that we have with DENSO is under the 12-inch IGBT. And it's our belief, given our diligence shows, we are moving into a 12-inch serving multiple purpose and benefits. One is performance and cost as well as the supply. The 12-inch does give the alternative solution to current supply term spend in IGBT space. And as we expect, the outer market will continue to grow, and we think this will serve that, and will be beneficial to both DENSO and UMC. And on the other hand is the specialty technology is what UMC is focused, and we still believe there will be more specialty technology required to fulfill the automotive application. And this DENSO collaboration is more a highlight to our ongoing effort in providing the support to the automotive market with our specialty technology, yes. So maybe Qidong can help with your second question.

[Chi-Tung Liu, executive]

Yes. In terms of non-op in Q1, about TWD 900 million is ForEx gain. And TWD 500 million is mark-to-market value gain from our investments. And there's also a TWD 300 million interest expenses. That's the bulk of non-op in Q1.

[Operator]

And ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. And now I'll turn things over to UMC Head of IR for closing remarks.

[Michael Lin, executive]

Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at [e-mail]. Have a good day.

[Operator]

Thank you. And ladies and gentlemen, that concludes our conference for 1Q '22. We thank you for your participation in UMCs conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.