United Microelectronics Corp

TWSE:2303

Earnings Call Transcript 2021-Q3

[Operator]

Welcome, everyone, to UMC's 2021 Third Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour 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 the UMC's conference call for the third quarter of 2021. I'm joined by Mr. Jason Wang, the President of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our President's key message to address UMC's focus and the fourth quarter 2021 guidance.

Once our President and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors, 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 these risks, please refer to UMC's filing with the SEC in the U.S. and the ROC security authorities.

Now, I would like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's third quarter 2021 financial results.

[Chi-Tung Liu, executive]

Thank you, Michael. I would like to go through the 3Q '21 investor conference presentation material, which can be downloaded from our website. Starting on Page 3. The third quarter of 2021 consolidated revenue was TWD 55.91 billion, with gross margin at 36.8%. The net income attributable to the stockholders of the parent was TWD 17.46 billion and the earnings per ordinary shares were TWD 1.43 and utilization rate in the third quarter of 2021 was a little bit over 100%.

Please turn to Page 4. So sequential comparison for the income statement. Revenue grew quarter-over-quarter by 9.8% to TWD 55.9 billion. Gross margin rate reached 36.8% or TWD 20.5 billion. And overall operating income is TWD 15.1 billion or 27.1%. Operating profit margin rate grew nearly 5 basis percentage point. For nonoperating income, because of the better performance in the equity market, the overall net nonop is around TWD 4.3 billion, significantly grow compared to the TWD 1.88 billion in the previous quarter. And overall net income attributable to the parent is TWD 17.46 billion or TWD 1.43 EPS and for U.S. ADRs, the earnings per share per ADS is USD 0.257.

For first 3 quarters of the year on Page 5, revenue grew by 17% to TWD 153.9 billion, mainly based on higher wafer shipments, better loadings as well as higher blended ASP. Gross margin rate is about 31.8% or TWD 48.9 billion. Operating income rate is 22.1% or TWD 34 billion. The net income for the first 3 months -- first 3 quarters of the year is TWD 39.8 billion, and the net income rate is 25.9%. Our accumulated EPS for the first 3 quarters has reached TWD 3.26 per share.

So Page 6 is our balance sheet. Our current cash on hand is about TWD 113 billion after the cash dividend payout. Total equity is about TWD 257 billion, as we continue to rise on both price increase as well as mix improvement. And the previous quarter, the third quarter ASP increase is nearly 8%.

On revenue breakdown, starting from Page 8, Asia represents about 65% of our total revenue and Japan, Europe and U.S. remain relatively decent for the -- compared to the previous quarter. IDM is about 14% and Fabless about 86%. Communication is around 46% of the total revenue, and consumer is about 27%. Computer has stayed about the same at around 17%. And, actually, almost every now is running at nearly full capacity. So the change has been minimal from a quarter-over-quarter basis. 28/22-nanometer consists of 19% of the total revenue and 40-nanometer is about 18%.

And we'll continue to see some mild capacity growth coming from both 12X in Xiamen as well as 12M in Japan. And for 8-inch, there's some incremental increase from various sets, especially 8N in Suzhou in China. So for the time being, the CapEx budget for 2021 remains unchanged at USD 2.3 billion. And majority, 85% is going to the capacity of 12-inch related expansion.

So the above is the summary of UMC's results for 3Q 2021. More details are available in the report, which can be -- has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.

[Jason Wang, executive]

Thank you, Chitung. Good evening, everyone. Here, I would like to update the third quarter operating result of UMC. In the third quarter, we continued to experience robust chip demand across computing, consumer and communication end segments. Higher 12-inch wafer shipments in the quarter reflect ongoing product mix enhancements and partially contribute to the lift in blended ASP. Overall wafer shipments grew 2.6% quarter-over-quarter to 2.5 million 8-inch equivalents. Revenue from 28-nanometer technologies continue to rise while business engagement in 22-nanometer have led to a growing number of customer tape-outs across wireless, display and IoT markets, further diversifying our product pipeline.

Looking into the fourth quarter, we anticipate wafer shipments and ASP trends will remain firm. Capacity utilization across 8-inch and 12-inch facilities will continue to remain fully loaded, as gross margin continue to exhibit upward momentum, thanks to our team's effort in optimizing capacity productivity and product mix. The current business cycle provides an opportune time for UMC to strengthen customer relationships, along with our technology competitiveness and the incremental capacity growth to elevate our market position. Our focus on growing our comprehensive logic and specialty technology portfolio has been welcomed by our customers, and we continue to broaden our product range to fulfill their needs.

With the P5 and P6 expansion projects underway at our flagship 12A facility in Tainan, given the strong demand from our customers, we are well positioned to grow and capture additional market shares in 2022. In addition, the company continued to make strides towards a greener future. Earlier this month, UMC was honored to receive the Green Chemistry Application and Innovation Award from Taiwan's Environmental Protection Agency. The award recognizes our efforts to introduce chemical substitutes that minimize impact to the environment and the health of our employees. At our Outstanding Supplier Awards this year, UMC also took the opportunity to reiterate our commitment to achieve net zero carbon emissions by 2050 and to invite suppliers to work with us to build a low-carbon supply chain.

As a key semiconductor player, UMC understands that we have a responsibility to proactively respond to climate change and to promote sustainable practice in our industry. Together with our upstream and downstream partners, we will continue to work toward our net zero carbon emission targets.

Let's move on to the fourth quarter 2021 guidance. Our wafer shipments will increase by 1% to 2%. ASP in U.S. dollars will increase by 1% to 2%. Gross profit margin will be in the high 30% range. Capacity utilization rate will be at 100%. Our 2021 cash-based CapEx will be budgeted at USD 2.3 billion.

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

[Operator]

[Operator Instructions] First question is coming from Randy Abrams, Crédit Suisse.

[Randy Abrams, analyst]

Congratulations on the good results. I wanted to ask the first question on capacity. Just factoring you're running 100% plus. Could you go into timing for the Phase 5 10,000 capacity, which quarter that capacity would be available? And then for Phase 6, where it's a bigger amount, the 27,500, would that all come on at the same time? And would that be beginning of 2023. Just trying to think of timing when the new capacity would come on. And just one follow-up on capacity. There were some talks you may consider further fabs in Singapore or additional capacity. Do you have plans beyond 2023 for additional capacity and see that potential option?

[Jason Wang, executive]

Sure. So the first is for the P5 10,000 expansion, the 28-nanometer will become online on Q2 2022. And the P6 will be in year of 2023, but in the later year of 2023. And we'll provide more specific the ramp schedule in a later day, given the current -- the [ true ] lead time availability update. The question about the news about the Singapore, we are unable to comment on any speculations as we always as we always do that. We don't comment on speculations. But we are always open to exploring new opportunities as long as we can enhance our shareholders benefits and we said that before as well.

Our strategy in the disciplined CapEx philosophy from our 2015 has not changed. We always try to drive our sustainable structural profitability based on the disciplined CapEx principle. So we have aligned with our customers as well as the market given our relevance in the marketplace before we're making any CapEx decision. Meanwhile, we continue -- we're consistently cooperating with our customer regarding the long-term development plan. Given our diversified production site, I think UMC has the luxury to evaluate different expansion options beyond P5 and P6. And we will discuss our expansion plan accordingly once we can deliver that.

[Randy Abrams, analyst]

And 2 follow-ups on that. One, you ran a few percent above 100%. But do you think as we go to next year, if demand is there, that would be the level you could operate? Or was there anything specific this quarter that you were able to push out more. So is that a level you could sustain?

And then the other follow-up was since the P6 will be later 2023, besides the 10,000, is there -- how much can you get from debottlenecking or other areas I saw fourth quarter, you have a bit of that. But if you have any other meaningful capacity.

[Jason Wang, executive]

Well, I mean in 2021, we have continued focus on the productivity improvement in addition to the incremental capacity, and we will do so for 2022 as well. And so we do expect that effort will continue. And at the current plan, and I think the -- we are targeting greater than 100%, right? But what we guided, we will guide as a fully loaded at 100%, but the effort will continue.

[Chi-Tung Liu, executive]

Yes, in terms of capacity, growth rate for the 2022, we currently estimate about 6% capacity increase versus 3% capacity increase in 2021.

[Randy Abrams, analyst]

And on 8-inch, is there any increase? Or is that all pretty much 12-inch?

[Jason Wang, executive]

It's pretty much all 12-inch now. The debottlenecking of the product migration will probably continue, but it's still within the same pool. Yes.

[Randy Abrams, analyst]

Okay. Great. And I wanted to ask on pricing. If you could give any look at how you're seeing pricing after this year? It looks like it might be up close to mid-teens for next year. If you see how you're seeing mature node and then also if any chance to reset the 28-nanometer? And if there's a way to think about where gross margins could go?

[Jason Wang, executive]

Okay. Well, first of all, we do foresee that ASP momentum will continue into 2022. However, we are not taking advantage of our customers doing the wafer shortage. So we kind of position our ASP in a more longer-term partnership over the near-term cyclical factors. So we kind of work with the customers to earn their trust and instead of exploiting the short-term opportunistic profit. And we do believe the pricing will reflect our market value and position. So we foresee the ASP momentum will continue into 2022. At this point, for the 2022, we anticipate the capacity will remain full on both 12-inch and 8-inch, and our 2022 outlook will outpace the foundry industry growth. And overall for the growth will come from a capacity increase, productivity improvement, I mentioned earlier as well as the ASP. And as far as for the 2022 full year ASP, we'll be able to provide you some guidance in the Q4 2021 conference call. Yes.

[Randy Abrams, analyst]

And just a last question. I'm considering like a downturn protection. If we eventually ultimately go into the next downturn, do you expect new price level? Or do you think the same kind of flexibility where we'd see a reversal? Like if it were to drop back to like 80s utilization for an extended time, like would we go back to kind of reversal? Or do you expect some firmness?

[Jason Wang, executive]

Well, I mean, I think the pricing is reflecting our market position, as I mentioned earlier. So as far as for the downturn, we have continued to strengthen the company's competitiveness, right? And that includes many areas. One is we continue to prepare ourselves for the downturn and because it's a cyclical industry. And we're focused on the structural demand in many megatrends, 5G, EV and IoT application. We have aligned with the key players in our first-tier customers through the technology offering that we have, and so UMC has the sole source. And in addition to that, the CapEx approach we deploy, requires some of the risk mitigation with the customer commitments.

In addition, with validated customers' confidence [indiscernible] increase in long-term agreements for future capacity expansion arrangement. And giving all those efforts that we have spent in the past years, in addition to what we just mentioned also on financial-wise, we believe the company has become more resilient in the event of the micros uncertainty. Therefore, I think the ASP will probably play a less role under such conditions and environments.

[Operator]

The next question is from Gokul Hariharan of JPMorgan.

[Gokul Hariharan, analyst]

Congratulations on the good results. My first question is about gross margins, just leading on from what Randy asked. We have seen a pretty strong gross margin expansion for UMC. Looks like we're still going to see further gross margin expansion. Could you talk a little bit about how you think gross margins settle down long term now that you have some visibility into some of the contracts that you have signed for the new capacity? Historically, I think one player has had very high gross margins, and everybody else has been at a much lower gross margin level. How would you characterize this, this year given that you also feel a little bit more comfortable about managing any potential downturn risk as well? So could you talk a little bit about how UMC thinks about gross margins over the next, let's say, 1 or 2 years, not just on a quarter-to-quarter basis? That's my first question.

[Jason Wang, executive]

Wow. That's a really -- well, first of all, we -- like you said, from a short-term wise, we do expect the momentum in our business growth and profitability will continue beyond Q2 -- Q4 2021, mainly due to the validation from our customers on the key markets and capture the structural demand. And given the value proposition that UMC provides to our customers, including our solutions, sufficient capacity and the growth path. And I said our goal at this point is we will strike a balance between the profit and long-term growth and -- along with our CapEx, the disciplined CapEx. We believe our approach will reflect our profitability results in the long run.

So when you talk about long run, I think that, that requires some of the balance at here, okay? So if we look out in the next couple of years, and while we're announcing the P6 expansion, and so obviously, some of the CapEx will happen in the next couple of years along with the long-term agreement that we have find out with the customer. And we believe we'll be able to manage that balance at a healthy level. But as far as the actual number, we probably won't be able to provide it at this time. But I think we feel fairly comfortable about our business model going forward.

[Chi-Tung Liu, executive]

Yes. Just to add on that, we will provide margin guidance on a quarterly basis. And so for the next quarter conference call, certainly, we will give overall outlook for the 2022.

[Gokul Hariharan, analyst]

So another question I had is, could you talk a little bit about -- I think over the last few years, you have increased your mix of specialty processes, automotive and other areas for 28, 40 and 55. Could you talk a little bit about what percentage of these process nodes are already specialty where there is a lot more sticky demand compared to what percentage is still like pure digital where there could be potentially more fluctuation in terms of demand?

[Jason Wang, executive]

I mean, right now for the specialty technology is occupied a little bit over 50% right now, and they are unique and customized to the customer. So it does give you a bit of more stickiness in terms of the customer relationship. In addition to that, there is also a sole-source product that we have engaged in. Combining with the specialty, I think the number will reach up to somewhere at the 70% -- above 70% range and along with the LTA protection. So in terms of overall business model at this point, we have certain confidence that they definitely have increased significantly on the stickiness side.

[Gokul Hariharan, analyst]

Okay. Just to clarify. So the 50% plus and 70% plus is on the overall capacity, right, for UMC?

[Jason Wang, executive]

Yes. Yes. Yes.

[Operator]

And next, we'll have Nick Gaudois of UBS for questions.

[Nicolas Gaudois, analyst]

Yes. The first one is on your LTA mechanism. If I recall, you mentioned last time that you may start to receive a prepayment from customers in the third quarter for -- in the framework of those LTAs for the capacity coming later. Is that the case? Or should we expect this to come at a later stage? And secondly, am I right to confirm that your ramp-up for the Phase 6 expansion is effectively pushed out by 1 to 2 quarters versus what you said last time? And if so, what is the reason? Is that related to equipment lead times already at this stage? Or is there any other -- are there any other factors influencing you saying what do you not expect to ramp up more in the latter part of '23 versus Q2?

[Chi-Tung Liu, executive]

Overall, for P6 currently on schedule, even though the equipment, some of the bottleneck equipment, the lead time may be stretched a bit, but we're still working closely with the equipment vendors. And it fall into the ballpark schedule we have agreed with our P6 partners. And majority, or if not 100%, of the P6 capacity is covered by this so-called long-term agreement. So this is nearly 100% all with LTAs.

[Nicolas Gaudois, analyst]

Great. And in that context, how about the prepayments then? Is that too early to see them? Or -- and if so when should we start to see prepayments coming through?

[Chi-Tung Liu, executive]

Part of that is -- a little bit of that is in this year's CapEx already for down payment, but it's a very small percentage. Majority of the payment will come along with the delivery of the tool, which will happen later 2022 and also first half of 2023. So the CapEx for 2022 and 2023, we will see the majority -- the bulk of the P6-related CapEx.

[Nicolas Gaudois, analyst]

Great. And just lastly, a bit of a technicality, but when we actually see that coming through, will it appear in basically payables? Or would you do a netting of CapEx basically?

[Chi-Tung Liu, executive]

Sorry, can you say that again, please?

[Nicolas Gaudois, analyst]

Yes. Just a bit of a technicality, but you'll see that coming through in payables in your balance sheet? Or would you actually just net out CapEx effectively? So when you're going to give us a CapEx guidance that would be -- would that be gross or net of those prepayments?

[Chi-Tung Liu, executive]

Our CapEx number is on a cash basis. So it's already -- if we pay it, then it will be included in their CapEx. And there are some payable as well, but it's not -- if it's falling in other years, the following year, it will not be included in this year's CapEx.

[Operator]

And next, we'll have Charlie Chan of Morgan Stanley for questions.

[Charlie Chan, analyst]

So my first question is about what's your observation about the end demand trend because for some specific subsectors like TV, you see panel price drop a lot. And some consumer MCU market seems to see weakness, right? If you look at those spot prices, et cetera. So I know your fab is still full, but you -- can you kind of give us some comments about the demand or customers' inventory?

[Jason Wang, executive]

Sure. We did also observe some mild correction from selected market segments caused by some of the demand softness and -- nevertheless, it did not affect UMC overall undersupply situation, just like you said, and which we expect this will continue through 2022. I think we haven't seen a significant concern on the inventory buildup side. And despite that, there are some inventory increase. The -- at this point, we continue to experience strong demand, while some mild correction were immediately placed by some unfulfilled demand during the long queue of the customers.

[Charlie Chan, analyst]

Okay. And I think Gokul just raised as a great question, right, about your customers' stickiness, right? So is it right that you said that 70% sticky business, meaning some customization, specialty with LTA, what was that the right number, 70%?

[Jason Wang, executive]

Yes. I think it's above 70%. Yes, above 70%.

[Charlie Chan, analyst]

Okay. Great. Yes. So my question is that how about the rest 30%. What would be your pricing strategy? By the way, I mean, the company gets a greater credit to identify these -- the price high potential earlier than your industry peers. So I'm curious about your pricing strategy for that rest of 30% business presumably is more commodity and customer has kind of a dual source.

[Jason Wang, executive]

We sort of touched that a little earlier. Our current focus is focused on some of the structural demand in the 5G, EV and IoT applications. We believe those demands will continue, and they are here to stay. So some of the vulnerable ones, and we have some protection and some of the mega trends associated with demand. And we believe they are here to stay. So given some of the market focus as well as the -- what we touched on the CapEx recent mitigation approach and along with the LTA, I think we clearly -- we are less vulnerable to this cyclical issue. And so we think the ASP will actually play a less role here. So that's why we actually feel fairly comfortable at this point. And if the market dynamic does change, we'll provide you the update.

[Charlie Chan, analyst]

Okay. That's fair enough. So I guess for some commodity, just to make some example, right? Like driver IC, MCU, meaning you see some potential risks in a downturn. So when you kind of take those orders, you already have some protection mechanism? Is that the right way to interpret your comments?

[Jason Wang, executive]

Yes, that's one way to put it. On the other hand, within the driver IC segment, there is also OLED driver, which is driving our momentum. So it's a combination of those and some of that requires sound risk mitigation mechanism. Some of that actually is more aligned to the growth of the segment. So it's a combination of that, yes.

[Charlie Chan, analyst]

Okay. Yes. And one topic that it seems like people care is about the Micron, those issue, right? I mean the -- sorry, I mean the -- you already settled with the U.S. Justice Department, right? But I mean 6 days ago, there was a news report about some ongoing civil lawsuits. Maybe Chitung can give us some updates, whether there's going to be some provision or kind of a legal expense on this case.

[Chi-Tung Liu, executive]

Yes. First of all, we don't comment on the news speculation. It's not a complete story, and it's not the full picture. So we don't comment on that. And also by law, we cannot comment on the ongoing litigation. And we didn't have any provision based upon our legal effort. We are still working on this case. So it's still ongoing. So that's always a comment for the time being.

[Jason Wang, executive]

In other words, is there is no update on any new development. No new development on this case. And if there is any new development, I think we'll certainly disclose that information accordingly.

[Charlie Chan, analyst]

So Jason, so I just think about another question that you're supposed to be very confident that your 2022 will outpace the foundry industry. So is that because you are expanding capacity more aggressively? Or you are going to high the ASP higher than your peers. Why you have such high confidence that you can outpace your foundry peers?

[Jason Wang, executive]

Well, given the current outlook of the 2022, we foresee those structural catalysts will continue to drive, including the 5G transformation, the EV and IoT devices. And those megatrends are still representing significant growth on a year-over-year basis. And we do anticipate those structural drivers will continue to fuel our growth including the OLED driver, the ISP, the WiFi-6, RF switch, MCU, PMIC, and so -- and which also lead to a higher silicon content.

So we are convinced that most of those demand surge are here to stay largely driven by those structural needs. So given those catalysts, and we have certain confidence. And -- I mean, in addition to that, based on our efforts and market position, that gives us that confidence that the 2022 will be another strong year for UMC to gain market share.

[Charlie Chan, analyst]

Yes. But the consensus for TSMC is like next year to grow 15% to 20%. So do you think you can perform similar or even better than this key foundry peer?

[Jason Wang, executive]

Our estimate on the foundry industry growth in 2022 at this point is about 12%.

[Charlie Chan, analyst]

12%. I'm sorry. Okay.

[Jason Wang, executive]

12%. Yes. And for our business outlook, I think we'll be higher than this current foundry industry projection.

[Charlie Chan, analyst]

Okay. And lastly, variable cost. I mean that is a key reason why foundry peers want to hike the price, right? So variable cost no matter percentage or per wafer number. So can Chitung give us some kind of comment about the trend? For example, this year-over-year, what was the growth for the variable cost? And what would be the variable cost growth for the coming 2 years?

[Chi-Tung Liu, executive]

Yes. For the operating expenses, it will be growing along with our enlarged revenue. However, as a percentage of revenue, we hope it will be flat to down, under control. So the revenue growth will outpace the operating expenses. As for raw material like raw wafer and also labors that were also on the rise. But altogether, I think we are commenting that because of our production efficiency improvement, our improved economy of scale, and also with a good outlook for both demand as well as pricing for 2022. I think there's still further upside for our margins -- profit margins.

[Operator]

The next question is coming from Roland Shu of Citigroup.

[Roland Shu, analyst]

So your Xiamen fab began production from 4Q '15. It was still loss-making last year, and I think it is still loss-making now. So with the better pricing, when do you expect Xiamen fab is going to be turned around? And also how many margin upside or earning upside to UMC once Xiamen fab is breakeven?

[Chi-Tung Liu, executive]

Xiamen should be able to be profitable in 2022. As a matter of fact, they are profitable in single quarters of 2021. So we are very close to breakeven in 2021. And it is expected to be profitable in 2022. However, it will still below corporate average in terms of profit margin in 2022. And there's still room for Xiamen to catch up to the level of UMC's corporate average.

[Roland Shu, analyst]

Understood. Yes. Do you have the time frame of when this Xiamen fab gross margin is going to approach corporate average?

[Chi-Tung Liu, executive]

No, we don't have a time frame. We -- all we can say is I can give you a rough comparison. Currently, our Singapore fab has higher gross margin than corporate average. And the Japan fab is catching up to almost identical to the UMC corporate average. And the Xiamen is, as I mentioned, coming out of loss-making to nearly breakeven this year. And it will be profitable next year, but still away from the corporate average.

[Roland Shu, analyst]

Okay. Then how about -- housekeeping point of view, how much can we model these subsidy from your partner in Xiamen once in next year it is going to be profitable?

[Chi-Tung Liu, executive]

Okay. Say that again?

[Roland Shu, analyst]

I think we still have this subsidy from our partner in Xiamen because Xiamen fab now is still loss-making. Now about next year, how much is subsidy we can model in our model?

[Chi-Tung Liu, executive]

It will be similar to this year, except for the interest expense subsidy, which is already expired. And everything else will be about the same for 2022 compared to 2021.

[Roland Shu, analyst]

So we'll be still around 1 billion per quarter.

[Chi-Tung Liu, executive]

Yes.

[Roland Shu, analyst]

Okay. Okay. And my second question is now including yourself, a lot of the foundry peers announced new capacity expansion plans. So in your view, how soon will the industry are to close the supply and demand gap of 8-inch and match in 12-inch foundry capacity. What are the key bottleneck of this supply-demand imbalance now?

[Jason Wang, executive]

Well, I mean, we can't really comment about our peers, and we don't know what their plans are. We do monitor the market landscape and adjust ourselves. The focus here is about our capacity growth and are those new capacity vulnerable or the existing capacity vulnerable or not. So given our newly deployed capacity will be 28 nanometers, the majority of our 28-nanometer capacity has been reserved by the LTA or single-source customer. Therefore, we believe that capacity will be maintained at high utilization rates for a very long time.

In addition, our mission to differentiate ourselves with our technology as well as the manufacturing excellence will enhance that stickiness. We kind of touched that earlier as well. So I think we will minimize the 28-nanometer vulnerability given our [indiscernible] by the customer portfolio, along with our continuous reduction in the breakeven utilization rate. I think as far as for the UMC relevance, I think we feel comfortable about that. And so as far as the landscape, the market capacity -- worldwide foundry capacity landscape goes, we will continue monitoring that.

[Roland Shu, analyst]

Understood. Okay. My last question is for your growth next year. You said you expect the overall foundry growth to be about 12%. And then you are going to outpace the foundry growth. However, for your overall capacity increase let's say is about 6%. So I think assuming next year you are going to fully load all this capacity. So still, the growth above 12%, I don't know you still need to rely on this ASP increase. So where will you see the ASP increase coming from? Is it mainly coming from this price hike or you still will have some product mix improvement next year?

[Jason Wang, executive]

It will be both. And the -- both the ASP momentum will be a combination of the product mix improvement as well as the pricing momentum, yes, the price increase. Yes.

[Roland Shu, analyst]

Yes. But since like your 3Q, most of the capacity has been fully loaded. So you really did not have too many product mix improvement according to your technology node, so I think this probably will be still the same next year because you guided on your 8-inch and 12-inch capacity will be fully loaded. Yes. So I expect this product mix improvement probably will be also very limited. So that means that for next year, you probably are still going to see more than 6% ASP improvement purely from this price hike. Is that right?

[Jason Wang, executive]

No. I mean, first of all, the 6% is capacity increase for the year. And that's mainly for the 10,000 booked on P5. And that will kick in the second quarter of '22. So -- and since the P5 is all contribute as 28-nanometers. So from a product mix standpoint, it has a lift to the ASP as well. So the 6% is really coming out from the new capacity. And in addition to the productivity improvement that we have demonstrated in this year, we expect there will be some coming from the factory side for the productivity improvement, along with the blended ASP improvement. And we expect we will outpace the foundry projected growth.

[Operator]

Next question is from Szeho Ng of China Renaissance.

[Szeho Ng, analyst]

My first question is regarding capacity expansion. Based on the current clean room space available in Singapore and Japan, how much more capacity in theory began at in those 2 areas?

[Jason Wang, executive]

Well, we have some footprint available. One is in our Japan fab. And we have some incremental footprint available in our 12A, the P6. And in addition to those 2 locations for our Xiamen facility, we also have a second phase footprint available to us. And meanwhile, we continue to be open to the other new opportunity as well and -- given the current market dynamics. So the future expansion footprint is always on our road map that we'll continue monitoring that.

[Szeho Ng, analyst]

I see. But outside Taiwan, outside China, let's say, in Singapore, how much more capacity we can add, just based on the current clean room space we have?

[Jason Wang, executive]

At this point, Singapore is at 100% full.

[Szeho Ng, analyst]

I see. Got you. Yes. And second question maybe for Chitung. Regarding the investment income, actually, the company has benefited quite a lot from the investment income for the last couple of quarters. So for modeling purposes, how should we model that line?

[Chi-Tung Liu, executive]

It's highly correlated to the stock market performance given our funds and investment portfolio. And so I guess it's going to be related to the future performance of the equity market. In the meantime, for the third quarter, we actually received about TWD 770 million of dividends from our investees. So third quarter is always the big season in terms of dividend collection. So that's adding to the numbers for the third quarter.

[Szeho Ng, analyst]

Okay. Got you. When I try to look at the breakdown, there's a lack or gains on financial assets at fair value through profit or loss. Is it also dependent on the equity market performance, right?

[Chi-Tung Liu, executive]

That's correct. Yes.

[Szeho Ng, analyst]

Congratulation on great results. Yes.

[Operator]

Next question is from Brett Simpson of Arete Research.

[Brett Simpson, analyst]

Yes. I had a question on display drivers. UMC has a high market share here. So can you maybe just help us understand what portion of current sales is coming from display drivers at the moment.

[Jason Wang, executive]

I mean, we actually don't do a breakdown by the applications. So -- but for the high-voltage process, if we break down by high-voltage process, which representing majority of the display segment, the high-voltage representing 30% of our specialty portion. Yes.

[Brett Simpson, analyst]

Okay. Okay. Great. And I know you include some of the customers in display drivers with long-term agreements. But is this the sort of business that can commit to long-term agreements? And we've seen, obviously, some huge price hikes for some of the customers and display drivers and some would say these are unsustainably high. So I'm just keen to get your perspective on how you see driver IC customers delivering on some of your contractual terms, and to what extent you're insulated from volatile swings in display driver fundamentals?

[Jason Wang, executive]

Well, I mean that's very good question. And since we have a larger exposure on the high-voltage side, and the -- so we kind of become more selective. So within the high-voltage space, there are also different subcategory. And for those that they have alternative solutions and or more vulnerable to the physical factors, we actually try to minimize those volumes. So we actually more concentrate in the area of the higher growth segment and -- as well as has -- more of an automotive segment has a longer life, higher qualification requirements. So they tend to have a higher stickiness. So we tend to be more selective within our high-voltage space. So that sort of give us the confidence that they'd be able to keep their contractual obligations.

[Brett Simpson, analyst]

Right. That's very helpful. And just on LTAs, can you maybe just help us what specific portion of sales is covered by LTAs at the moment? And how might this change next year? And I guess, can you share with us -- does the LTAs include -- is it wafer capacity guarantees? Or is it more pricing guarantees or both? Under what conditions are you setting LTAs today? And could these be renegotiated by customers at some point in the future?

[Jason Wang, executive]

It's actually pretty complicated and I will [ whether ] not to elaborate in detail. But in general sense, it's really more CapEx related, and then we have a longer-term LTA coverage. And that's nonCapEx related, and we have more of the LTA under such capacity reservation approach. And most of the LTA does have both the pricing and capacity included. And so it's a combination of many. And given the condition of the supply and reservation situation, then we align with our customers for those LTA conditions. Yes.

[Chi-Tung Liu, executive]

Yes. As for the percentage, like I mentioned earlier, nearly 100% of the P6-related capacity are covered by LTA. And the remaining capacity, also we are seeing the increasing trend. The new orders are covered by LTA as well. Unfortunately, we don't disclose the percentage. But Jason did mention that LTAs plus single source consists more than 2/3 of our overall capacity. And it looks like the LTA trend is continuing.

[Operator]

Next one is Bruce Lu, Goldman Sachs.

[Zheng Lu, analyst]

Okay. So I think I remember, Jason, 2 quarters ago, talked about like 8-inch pricing is pretty much fully reflect your value, but you need to work on the 12-inch. So my current assumption is that for 2022, your pricing will fully reflected your value. However, my question is that even with that -- again, that was my assumption that the gross margin is still have some gap with the industry leader, even for the fully depreciated 8-inch. So my question is that either the value is not fully reflected or the productivity gap with the industry leader is still -- there is still some gap. So which one will be? If that has to do with the productivity, when can you narrow the gap and see another level up of the profitability?

[Jason Wang, executive]

Well, first of all, I don't think we ever gave a breakdown of the 12-inch and 8-inch in terms of 8-inch profitability. We did comment about the 8-inch ASP. But usually, we typically, we don't give a breakdown on profitability of 8-inch. So in our internal data, we actually feel a little bit different. We have a different perspective than what you just commented. So the -- we actually feel fairly comfortable about our 8-inch market position. I think the gap between us as a blended result compared to the peers, I can't comment on our peers, but we believe there is a also a matter of the scale and also the mix of the product.

So it does definitely have a difference between different companies. And so we're going to continue improve our solution competitiveness. And along with our manufacturing side, plus the incremental capacity support that we have aligned with our customers, we believe we can continue to enhance our market position by bridging the gap. And I think we are making good progress, and I think there's still some room. And -- but I think we're fairly close, yes.

[Zheng Lu, analyst]

I'm sorry, let me clarify it because in the past, when [indiscernible] was trying to list in China, the gross margin for the 8-inch fab was disclosed a demo at least for the [indiscernible]. That was somewhere around like below the industry peer or even below the industry leader. But what Jason just mentioned is that the latest internal data suggested that your 8-inch profitability is actually very competitive. Is that the right understanding?

[Jason Wang, executive]

Yes. Yes, if you look at our overall 8-inch operation, yes.

[Zheng Lu, analyst]

Understood. Okay. So the next question is regarding to the compound semi. I think UMC has a subsidiary for the compound semi. So recently, we do see some stronger than expected demand for that. So can you comment on your strategy for the compound semi? Are you going to expand it? Or what's the key application? What's the target for your compound semi business?

[Jason Wang, executive]

Well, I mean, this is definitely an area -- important area for us, and we have devoted to this market. And we have put in our resource and the technology development team on the project. I think the market has significant potential. And at this point, we're still relatively small at the beginning -- at the early stage of the business development, but we remain pretty confident about that. Within the compound space, there are different market segments. And we are -- at this point, we are in the process decided on some of the selected area that we believe we can be relevant. And so -- and once we have concluded that, we actually will be able to share that with you. We're not going to go all out to address the overall compound, but there will be selected areas that we're going to be focused on. And focus on those areas and continue executing our plan to make sure that we will be relevant within those space.

[Zheng Lu, analyst]

But will you turn aggressive in terms of expanding your capacity for the compound semi?

[Jason Wang, executive]

I mean given the compound's market outlook, I don't think the capacity is a critical -- at a critical juncture yet. We have a sufficient capacity to support our current activities. And once the demand requires additional capacity, we will definitely aggressively pursue that.

[Operator]

Next one, Frank Lee, HSBC.

[Frank Lee, analyst]

So I just wanted to ask maybe a longer-term question in terms of -- we've seen, I guess, in the industry, some of your peers are now talking about expanding and even expanding in other countries. And we see a lot of discussions about other -- geopolitically about countries wanting to reestablish the semiconductor supply chain. Is this something that UMC would consider as well in terms of expanding in other regions outside of Asia?

[Jason Wang, executive]

Well, we have been very diversified. We have a facility Japan, we have a facility in Singapore and China as well. So we have been very diversified in the past, and we will continue to do that and we'll continue exploring that. Given the recent hype of a semiconductor market, in many countries or many regions talking some of the incentive plan for building a facility in those locations, we're certainly evaluating those. And the key of the building of new -- the greenfield facility is not only the ROI, it is also the customer engagement. So we are open to customer feedbacks. And along with our ROI considerations and we'll definitely make sure that we follow our disciplined CapEx philosophy. So -- and if there is a decision on certain locations, we'll disclose that accordingly.

[Frank Lee, analyst]

Okay. And then I have just a follow-up question on, I guess, the CapEx and capital intensity. Based on your CapEx for 2021 of $2.3 billion, it seems to suggest your CapEx to sales is going to rise to about 30% versus 15% last year. As we go forward in the next couple of years, should -- how should we think about this capital intensity business? I know you have an LTA for your P6, but just in general, should we see thinking at 30% as kind of a new norm? Or can you give us any kind of clues or indication on how we should think about this?

[Chi-Tung Liu, executive]

Yes. We don't really do capital intensity. But in a way, we do monitor our profitability structures and our affordability. But more importantly, as Jason mentioned, it is also related to customer engagement and our technology differentiation, et cetera. So we want to be a relevant player and customer can stick with UMC for longer term. So all the CapEx is not really pure capital intensity point of view. It is a combination of various reasons.

[Frank Lee, analyst]

Okay. So -- but I guess -- so there's no real target that we should look at in terms of what that capital intensity would look like? Because I think it's quite a big change in the past year. But going forward, there isn't any explicit target we should think about?

[Chi-Tung Liu, executive]

It is a boundary -- internal boundary. I mean, we don't want to overspend for sure. We don't want to be overly aggressive in terms of affordability. But we don't also -- just for the sake of spending, if we have money and we just spend it, it's not the case. We really have to protect it by the customers' risk mitigation methodology as well as the future longer-term corporate development plan. So even if we can afford it, we may not do it. Depends on the customers' needs and customer engagement.

[Jason Wang, executive]

Yes. So may I add? The capital intensity is more of the active fab measurements, right? I mean, the condition that we measure on really if we invested at the right time at the right place with right know and with the right customers. So if we believe it's within the UMC affordability level and meeting all the conditions that we set out to do and follow our CapEx discipline philosophy, and then we'll release the CapEx. And we'll present and approve that CapEx and release it. So after that, definitely we'll be able to come back and measure that intensity issue, but the intensity wasn't the first level of consideration.

[Operator]

And we are taking the last question, the last one, Gokul Hariharan of JPMorgan.

[Gokul Hariharan, analyst]

I just wanted to delve into some of the demand-related dynamics given there is a lot of concerns about cycle ending among investors. How does the -- how does UMC management look at and -- look and assess demand book? And how do you get comfort about continued growth into next year, especially, I think you're modeling foundry industry to grow double digit and UMC to grow even faster than that? Could you share with us some of those, like how you kind of develop comfort around that fact? And is there some kind of book-to-bill or a nonsupported demand kind of expectation that you monitor, which you can share to give some comfort to the market also?

[Jason Wang, executive]

Well, we did observe some of the softness, as we mentioned earlier. The -- but in 2022, despite a lower contribution in wafer demand associated with the work from home and home learning, we still expect some of the demand will continue, and we call it structural demand, 5G, EV, IoT. And those demand remains strong. And we still have a significant unfulfilled demand within those segments. And while we're estimating the growth of the market is at 12%, along with our current alignment with the customer, we think we'd be able to outgrow that.

And so -- and also, we have tracking the overall inventory situation. We see some rise of inventory, but we also see some of the shortage components. There is some of the longer life, shorter life, and we have some triangulate that, along with the end customer and the direct dialogues that give us the confidence that we're still on the shorter side of the supply side. And so while we are still under the catch-up mode. And it has further validated that some of the softness being fulfilled with unfulfilled demand immediately. And so we still -- at this point, we still feel confident about the 2022 outlook.

[Operator]

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

[Michael Lin, executive]

Thank you, everyone, 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 third quarter 2021. We thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com, under the Investors, Events section. You may now disconnect. Goodbye.