United Microelectronics Corporation (NYSE:UMC) Q3 2021 Earnings Conference Call October 27, 2021 5:00 AM ET

Company Participants

Jason Wang – President
Michael Lin – Head of Investor Relations
Chi Tung Liu – CFO

Conference Call Participants

Randy Abrams – Credit Suisse
Gokul Hariharan – JP Morgan
Nick Gaudois – UBS
Charlie Chan – Morgan Stanley
Roland Shu – Citigroup
Szeho Ng – China Renaissance
Brett Simpson – Arete Research
Bruce Lu – Goldman Sachs
Frank Lee – HSBC

Operator

Welcome everyone to UMC's 2021 Third Quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation there will be a question-and-answer session. Please follow the instructions given at the time if you would like to ask a question. 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, Investor's Events section. And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

Michael Lin

Thank you and welcome to the UMC's Conference Call for the Third Quarter of 2021. I am joined by Mr. Jason Wang, the President of UMC and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial result, 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 section.

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 [Inaudible] security authorities. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's Third Quarter 2021 financial results.

Chi Tung Liu

Thank you, Michael. I would like to go through the 3Q 21 -- '21 investor conference presentation material, which can be downloaded from our website. Starting on page 3, the third quarter of 2021, consolidated revenue was 55.91 billion NT with gross margin at 36.8. The net income attributable to the stockholder of the parent was $17.46 billion NT. And the earnings per ordinary shares was $1.43 NT.

And you'd -- addition in the third quarter of 2021 was a little bit over a 100%. Please turn to Page 4. For the sequential comparison for the income statement, revenue grew quarter-over-quarter by 9.8% to NT$ 55.9 billion. Gross margin rate reached 36.8% or NT$ 25 -- NT$ 20.5 billion. And overall operating income is NT$ 15.1 billion or 27.1%. Operating profit margin rate grew nearly 5 basis percentage point. For non-operating income, because of the better performance in the equity market, the overall net non-GAAP is around NT$4.3 billion.

Significantly growth compared to the 1.8 billion in the previous quarter. And overall net income attributable to the parents, 17.4 billion or 1.43 EPS. And for U.S. ADRs, the earnings per share per ADS is 0.257. For first three quarter of the year on Page 5, revenue grow by 17% to 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 NT$ 48.9 billion.

Operating income rate is 22.1% or NT$ 34 billion NT. The Net income for the first 3 months -- first 3 quarter of the year is 39.8 billion, and the net income rate is 25.9%. Accumulate EPS for the first 3 quarter has reached NT$ 3.26 per share. So page 6 is our balance sheet. Our current cash on hand is about a NT$113 billion after their cash dividend payout. Also equity is about 257 billion. As we continue to rise on both price increase as well as mix improvement and the previous quarter, the third quarter, the increase is nearly 8%. On revenue breakdown, starting from Page 8, Asia represents about 55% of our total revenue.

And Japan, Europe, and U.S. remained relatively the same compared to the previous quarter. IDM is about 14% and Fabless is about 86%. Communication is around 46% of the total revenue and Consumer is about 27%. Computers stayed about the same as around 17% And timely -- actually, almost every [Indiscernible] is running at nearly full capacity, so the change has been minimum on a quarter-over-quarter basis. 2822 nanometer comp -- consists of 19% of the total revenue and 40 revenue -- 14-nanometer is about 18%.

And we will continue to see some mile capacity growth coming from both 12 [Indiscernible], as well as [Indiscernible] in Japan. And for [Indiscernible] some incremental increase from various [Indiscernible], especially AN in [Indiscernible] in China. For the time being, the capex budget for 2021 remains unchanged at US$2.3 billion, and majority 85% is going to the capacity of traveling related expansion. 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

Thank you Chi - Tung. Good evening everyone. Here I would like to update us Third Quarter operating results of UMC. In the Third Quarter, we continue to experience robust chip demand across computing, consumer and communication and segments. Higher 12-inch wafer shipments in the quarter reflects ongoing product mix enhancement and partially contribute to the lift in blended ASP.

Overall wafer shipment grew 2.6% quarter-over-quarter to 2.5 million 8-inch equivalent. Revenue from 28 nanometer technologies continued to rise while business engagement in 22 nanometer have that to a growing number of customer tape-outs across wireless display, in IoT markets. further diversifying our product pipeline. Looking into the fourth quarter, we anticipate wafer shipment and ASB trends will remain firm. Capacity utilization across 8-inch and 12-inch facility will continue to remain fully loaded. As gross margin continue to exhibit upward momentum, thanks to our team's effort in optimizing capacity productivities, and product mix.

The current businesses 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 recognized our efforts to introduce chemical substitutes that minimize impact to the environment and the health of our employees.

At our outstanding supplier award this year, UMC also took the opportunity to reiterate our commitment to achieve net 0 carbon emission by 2015, and to imply 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 towards our net 0 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 $ 2.3 billion. That concludes my comments. Thank you all for your attention. Now, we are ready for questions.

Question-and-Answer Session

Operator

Thank you, President Wang. And ladies and gentlemen, we will now begin our question and answer session. [Operator Instructions]. After you are announced, please ask your question. [Operator Instructions]. Thank you. First question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Randy Abrams

Yes. Thank you and congratulations on the good result. I wanted to ask the first question on capacity, just factory you're running a 100% plus. Could you go into timing for the phase 5 10K capacity, which quarter that capacity will be available? And then for Phase 6, where it's a bigger amount, the 27.5K. 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 1 follow-up on capacity. There were some talks you may consider up further fab in Singapore or additional capacity. Do you plan beyond 2023 for additional capacity to see that potential option?

Jason Wang

Sure. So the first is for the P5, 10-K expansion. The 28 nanometer will become online Q2, 2022. And the P6 will be a year of 2023, but in the later year for 2023. And we'll provide more specific the ramp schedule in a later day, giving the current -- the 2D kind availability updates.

The question about the -- the news about the Singapore, we're unable to comment on any speculations as we -- as we always do that. We don't like to -- we don't comment on speculations, but we are always open to exploring new opportunity as long as we can enhance our shareholders benefit. And we say that before as well. Our strategy in the disciplined capex philosophy from our [Inaudible] has not changed. We always try to drive our sustainable structure profitability based on the disciplined capex principal. So we have aligned with our customer, and as well with the market given our relevance in the marketplace before we making capex decision.

Meanwhile, we continue -- you know, we consistently cooperating with our customer regarding the long-term development plan, giving our diversified the product -- production side, I think UMC has -- had the luxury to evaluate different expansion option beyond P5 and P6. And we will discuss our expansion plan accordingly once we can -- we can deliver that.

Randy Abrams

Okay. And 2 follow-ups on that. 1, you ran a few percent above 100%, but do you think as we go the 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-K, is there -- how much can you get from the bottleneck or other areas, right? I saw fourth quarter, you have a bit of that, but if you have any other meaningful capacity.

Jason Wang

Well, in 2021, we have continue 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 -- if we target greater than a 100%, right? But as what we guided, we will guide it at the fully loaded at 100%, but effort we will continue. The --

Chi Tung Liu

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

Randy Abrams

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

Jason Wang

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

Randy Abrams

Okay. Great. And I wonder tax come on pricing, if you could give out 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 is a way to think about where gross margins could go?

Jason Wang

Okay. Well, first of all, we do foresee the ASP momentum will continue into 2022. However, we are not taking advantage of our customers during the wafer shortages. So we position our ASP In the more longer-term partnership over the near-term cyclical factors. So we work with our customers to earn their trust. And instead of exporting the short-term [Indiscernible] profit. And we do believe the pricing will reflect our market value and position. We foresee that the AC momentum will continue into 2022. At this point for the 2022, we anticipate our 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 Q4, 2021 conference call.

Randy Abrams

And just a last question on -- 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 80 [Indiscernible] for an extended time. Would we go back to reversal or do you expect some firmness?

Jason Wang

Well, I mean, I think the pricing is reflecting your market position, as I mentioned earlier, so as far as for the downturn, we have continued to strengthen the Company's competitiveness and that includes many areas. 1 is, we continue to prepare ourselves for the downturn. And because it is a cyclical industry and well focused on the structured demand in many mega trend. 5G [Indiscernible] IoT application, we have a line up with the key players in our first tier customer sue the technology offering that we have. And so UMC as 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, we've validated customer's confidence and you will see some of the increase in long-term agreements for future capacity expansion arrangement. And getting all those efforts that we have spent in the past years, in addition to what which has mentioned also on financial wise, we believe the Company has become more resilient in the event of the Micro's uncertainty. Therefore, I seen the ASP will probably play a less role under such conditions.

Randy Abrams

Okay, great. Thanks a lot, Jason and Chi-Tung.

Jason Wang

Sure. Thanks.

Operator

The next question is from Gokul Hariharan of JP Morgan. Go ahead, please.

Gokul Hariharan

Thanks. Congratulations on the good result. 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 -- their much lower gross margin level. How would you characterize this year, given that you also feel a little bit more comfortable about managing any potential downturn risks 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

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 to be on Q2 -- Q4, 2021, mainly due to the validation from our customers on the key markets and capture the structure demand. And given the value proposition that UMC provide to our customer, 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, to discipline the CapEx. We believe our approach will reflect our profitability results in the long run. So when you talk about long run, I think that requires some of the balance at year, 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 final 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 will probably won't be able to provide it at this time, but I think we will feel fairly comfortable about our business model going forward.

Chi Tung Liu

Yeah, just to add on that, we will provide a margin guidance on a quarterly basis. And so far in the next quarter, conference call, certainly, we will give an overall outlook for the 2022.

Gokul Hariharan

Thanks. [Indiscernible] 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 [Indiscernible] digital, that there could be potentially more fluctuation in terms of demand?

Jason Wang

Right now for the specialty technology is occupied up 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's also a sole-sourced products that we haven't engaged it. 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

Just to clarify, so the 50% plus and 70% plus is on the overall capacity, right? For UMC?

Jason Wang

Yes. Yes. Yes.

Gokul Hariharan

Okay. Yeah. Thank you very much. Thank you.

Jason Wang

Sure.

Operator

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

Nick Gaudois

Yes. Good afternoon. Thanks for taking my questions. First one is on your [Inaudible] mechanism. You probably recall, you mentioned last time, but you may start to receive a prepayment from customers in the third quarter for -- in the framework of all the [Inaudible] for capacity coming later. Is that [Inaudible], or should we expect these 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 one to two quarters versus what you said last time? And if so, what is the reason as related to [Inaudible] times already at this stage, or is there any other -- are there any other factors influencing you saying we do not expect to ramp up more into the latter part of '23 versus Q2? Thank you.

Chi Tung Liu

For P6, currently it's on schedule. Even though the equipment -- some of the bottleneck equipment, lead time maybe 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 a 100% of the P6 capacity is covered by this so-called long-term agreement. So it is nearly a 100% always LTAs.

Nick Gaudois

Great. And in that context, how about the prepayments? Is that too early to see them or when should we start to see prepayments coming through? Thanks.

Chi Tung Liu

Part of that is in -- 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 payments 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, will see the majority -- the bulk of the P6 related CapEx.

Nick Gaudois

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

Jason Wang

Sorry. Can you say that again, please?

Nick Gaudois

Yes, just a bit of a technicality, but you'll see that coming through in payables in your Balance Sheet or would actually just set up CapEx effectively? So -- and you got to give us a CapEx guidance that would be -- would that be gross or net of those prepayments? Thanks.

Chi Tung Liu

Our CapEx number is on a cash basis. So it's already -- if we paid, then we will be including 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.

Nick Gaudois

Perfect. Understood. Thank you very much.

Operator

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

Charlie Chan

Thanks. Hi, good afternoon, gentlemen. So my first question is about, what's your observation about the in demand trend? Because for some subsidy access sector like TV, you see it's panel pies job a lot. And some consumer UMC market seems to see weakness, right? If you look at those spot price and etc. I know your Fabless is still 4, but you -- can you give us some comments about the demand or customers inventory? Thank you.

Jason Wang

Sure. We did also observe some mild correction on selective margin segments caused by some of the immense [Inaudible]. And nevertheless, it did not affect UMC 's 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 demands, while sound and mile correction were immediately replaced by some of the unfulfilled demand, given the long queue of the customers.

Charlie Chan

Okay. I think Gokul just raised a great question about your customers taking it. So is it right that you said that 70% are sticky business, meaning some customization specialty was LTA. What was said the right number, 70%?

Jason Wang

I'd say is above 70%, yes. About 70.

Charlie Chan

Okay. Great. Yeah. So my question is, how about the rest, 30%? What would be your price [Indiscernible] By the way, the Company gets a greater credit to identify these -- the price hike potential earlier than your industry peers. So I'm curious about your pricing strategy for that rest of 30%?. It seems pretty assemblies and moral commodity? and customers has [Indiscernible]. Thank you.

Jason Wang

We touched that a little bit earlier. Our current focus is focused on some of the structure demand, in the 5G IoT applications. we believed those demand will continue and they are here to stay. So from the vulnerable one and we have some protection and some of the mega trends associated with demand. And we believe they are here to stay. So giving some the market focus, as well as the -- while we touched on the capex recent mitigation approach and alone with the LTAs, I think we fairly -- we are less vulnerable to this cyclical issue. And so we've seen 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 will provide you with the update.

Charlie Chan

Okay. Fair enough. So I guess, for some commodity -- I -- just a mix some example right? Like a driver IC MCU, meaning you see some potential risks, right, like downturn. So when you take those orders, you already have some protection mechanism, is that right way to debrief your comment?

Chi Tung Liu

Yeah, that's 1 way to put it. On the other hand is within the driver IC segment, there's also all-day driver, which is on --

Charlie Chan

Right.

Chi Tung Liu

--our momentum.

Charlie Chan

Right.

Chi Tung Liu

So it's a combination of those and some of them requires founder risk mitigation mechanism. Some of that actually is more aligned to the growth of the segment. So it's a combination with that, yes.

Charlie Chan

Okay. Thanks. Yeah. And 1 topic that seems like people care is about the micro -- those issues. The, the -- sorry, I mean the -- [Inaudible] was the U.S. Justice Department, right? But 6 days ago, there was a news report about some ongoing CVO lawsuits. Maybe Chi - Tung can give us some updates whether there's going to be some provision or legal expanse on this case? Thank you.

Chi Tung Liu

Yeah. First of all, we don't comment on the news speculation. It's another completely -- complete story, and it's not the full picture. We don't comment on that. And also by law, we cannot comment on the ongoing litigation. And within our [Inaudible] provision, based upon the legal effort, we are still walking this case. So it's still ongoing. So that's all we can comment for the time being. In other words, is there is no update. Any of the new development. No new developments on this case. And if there is any new development, I think we'll certainly disclose that information accordingly.

Charlie Chan

Thanks Bruce (ph). So Jason so I just think about another question that you -- it used to be very confident that your [Indiscernible], will pass the foundry industry. So is that because you're spending capacity more aggressively or you are going to high the ASP higher than your peers? Why you have such high confidence, you can outpace your [Indiscernible] peers?

Jason Wang

Well, given the current outlook of the 2022, we perceive those structure catalysts will continue drying including the 5G transformation, the EV, NDA, and the IoT devices. And those megatrend was due representing significant growth on year-over-year basis. And we do anticipate those structure driver will continue to fuel our growth, including the OLED driver, the ISP, the Wi - Fi 6, RF switch, MCU, PMIC, and so -- and which also lead to a higher sort of confidence, right? So we are convinced the multiple events surge are here to stay, largely driven by those structured needs. So given those capitalist, and we have further confidence and -- I mean, in addition to that, based on our efforts and market position, that give us confidence that the 2022 will be another strong year for UMC to get market share.

Charlie Chan

Yeah. But the consensus for TSMC is next year to grow 15% to 20%. Do you think you can perform similar or even better than these key foundry peer?

Jason Wang

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

Charlie Chan

Oh, 12%? I'm sorry. Okay.

Jason Wang

Yes. It's at 12%.

Charlie Chan

Okay.

Jason Wang

Yes.

Charlie Chan

Okay.

Jason Wang

And for our business outlook, I think we'll be higher than the current Company industry projections.

Charlie Chan

Okay. And lastly, variable cost. There is a key reason why foundry peers want to hike the price. So variable cost and [Indiscernible]per wafer number, so can Chi-Tung give us some comments about trend. For example, this year -- year-over-year, what was the growth for the variable cost and what would be the variable costs growth for the coming 2 years? Thank you.

Chi Tung Liu

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

Charlie Chan

Got you. Super helpful. Thanks, gentlemen.

Operator

Next question is coming from Roland Shu of Citigroup. Go ahead, please.

Roland Shu

Hi. Good afternoon. For your [Indiscernible] begin potassium from 4Q15, it was still loss making our last year and I think in this year are loss making now. So with the better pricing, trend to [Indiscernible] is going to be turning around. And also how many margin upside or any upside to UMC once [Indiscernible] is [Indiscernible]

Jason Wang

Chairman should be able to be profitable in 2022. A matter of fact, they are profitable in single quarters of 2021, so we are very close to bring even in 2021, and [Indiscernible] expect to be profitable in 2022. However, it was still below our corporate average in terms of profit margin in 2022. And there's still room for Chairman to catch up to the level of UMC's corporate average.

Roland Shu

Understood. Do you have a time frame of when at least some in Fab gross margin is going to approach corporate average?

Jason Wang

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 Japan Fab is catching up to almost identical to the UMC corporate average. And the Xiamen one is, as I mentioned, it's coming out of loss making to nearly break-even this year. And you will be profitable next year but still away from the corporate average.

Roland Shu

Okay. Then how about for house keep -- keeping point of view, how much can we model a little [Indiscernible] from your partner in [Indiscernible], why [Indiscernible] going to be profitable?

Chi Tung Liu

Okay. Say that again.

Roland Shu

I didn't -- we still have this on your [Indiscernible] our partner in [Indiscernible] for -- because our Chairman said now is still a loss making, how about next year, how [Indiscernible]. We can model in our model.

Chi Tung Liu

[Inaudible] 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

We'll be still around 1 billion per quarter?

Chi Tung Liu

Yeah.

Roland Shu

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

Chi Tung Liu

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 adult new capacity vulnerable, or this isn't capacity vulnerable or not. So giving 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 excellent will enhance that stickiness. We touched that early as well. So I think we will minimize the 28 millimeter printability, giving our efforts that by the customer portfolio. Along with our continuous reduction in the break-even utilization rates. But I think as far as for UMC relevance, I think we feel comfortable about that. And so as far as the landscape, the market capacity and the worldwide foundry capacity landscape goes, we will continue monitoring that.

Roland Shu

Understood. Okay. My last question is on your -- for Europe growth next year. You said you expected the overall foundry growth to be about 12%, and then you are going to outpace foundry growth. [Inaudible] for your overall capacity increased [Inaudible] is about a 6%. I didn't -- assuming next year you are going to fully loaded of this capacity, so still 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 this year?

Chi Tung Liu

It will be both, and the -- it'll be both -- the ASP momentum will be a combination of the product mix improvement as well to the pricing momentum, yes. The price increase yes.

Roland Shu

Yes. But it seems -- like your 3Q, most of the capacity have been fully loaded. So you really did not have too many product mix improvement. According to -- by your technology node. So I think this probably will be still the same next year because you guided annual of -- your 8-inch and 12-inch capacity will be fully loaded. So I expect this product mix improvement probably will be also very limited. So that means for next year, you probably are still going to see more than

Roland Shu

6% ASP improvement purely from this new price hike? Is that right?

Jason Wang

No. First of all, the 6% is the capacity increase for the year. And that's mainly for the 10-K on P5, and that will kick-in in the second quarter of '22. And since the P5 is all contributed as a 28-nanometers, so from a product mix standpoint, it has a lift to the ASP as well.

Roland Shu

Okay.

Jason Wang

[Indiscernible] is really coming from the new capacity. And in addition to the productivity improvements that we have demonstrated in this year, we expect there will be some coming from the factory side for the productivity improvements along with the [Indiscernible] improvement. And we expect -- we will out pace the foundry projected growth. Yes.

Roland Shu

Understood. Okay. It is helpful. Thank you.

Operator

Next question is from Szeho Ng of China Renaissance. Go ahead, please.

Szeho Ng

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

Jason Wang

While we have some footprint available, one is in our Japan fab, and we have some of the incremental footprint available in our 12-8, the P6. And in addition to those two location where for our [Indiscernible] facility, we also have a second phase of footprint available to us. And meanwhile, we come open to the other new opportunity as well, and giving the current market dynamics. So the future expansion footprint is always on our roadmap that we'll continue monitoring that.

Szeho Ng

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

Jason Wang

At this point, Singapore is 100%.

Szeho Ng

I see. Got you. And second question, maybe for Chi-Tung, regarding investment income. Actually, the Company's benefit quite a lot from the investment income data for the last couple of quarters. So for modeling payables, how should we model that line?

Chi Tung Liu

It's highly co-related 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 receive about NT$ 770 million of dividends from our investees. So third quarter is always the peak season in terms of our dividend collection. So that's just adding to the numbers for the third quarter.

Szeho Ng

Okay. Got you. When I try to look at the breakdown [Indiscernible] gains on financial assets at fair value through profitable loss [Indiscernible] is also dependent on the equity market performance rate?

Chi Tung Liu

That's correct. Yes. Okay, all right. Okay. Thank you very much. Congratulations on the good results.

Operator

Next question is from Brett Simpson of Arete Research. Go ahead, please.

Brett Simpson

Yes. Thanks very much. 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? Thanks.

Jason Wang

We actually don't do a breakdown by the applications. But for the high voltage process, it will breakdown by high voltage profit, which representing majority of the display segment. The high voltage representing our 30% of our specialty portion.

Brett Simpson

Okay. Great, thanks. 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 in display drivers. And some would say these are unsustainably high. So I am 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? Thanks.

Jason Wang

That's a very good question. And since we have a larger exposure on the high-voltage size end year, so we become more selective. So within the high voltage space, there are also different subcategory. And for those that they have alternative solutions and are more vulnerable to the physical factors, we actually try to minimize those volumes. So we actually are more concentrated in the area of the higher growth segment, and as well has more of mobile automotive segment. It has a longer live higher qualification requirements, so they tend to have a higher stickiness. So we tend to be more selective using our high voltages space. So that gave us the confidence they'd be able to keep their contractual obligations.

Brett Simpson

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? Thank you.

Jason Wang

It's actually pretty complicated and I will rather not to elaborate in details. But in general sense, it is really more CapEx related. And then, we have a bit of a longer-term LTA coverage. And if that's non - CapEx related. And we have more of the LTA under such color capacity reservation approach. And multiple 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.

Chi Tung Liu

Yeah. 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 mentioned that LTA plus single-source consists more than two-thirds of our overall capacity and looks like the LTA trend is continuing.

Brett Simpson

Sir, that's helpful. Thank you.

Operator

Next one is Bruce Lu, Goldman Sachs. Go ahead, please.

Bruce Lu

Okay. Good afternoon, and thank you for taking my question. I think I remember days and two quarters ago, talk about why 8'' pricing is pretty much fully reflect your value, but you need to work on the 12''. So my current assumption is that for 2022, your pricing will fully [Inaudible] your value. However, my question is that even with that, again, that was my assumption that the gross margin 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 it's the productivity gap with the industry leader still -- there's still some gap. So which one it will be, if that is the last size to do with the productivity? When can you narrow that gap to see another level up of profitability?

Jason Wang

Well, first of all, I don't think we ever gave a breakdown of the 12'' and the 8'' in terms of the 8'' profitability where we did comment about the 8'' ASP. But usually we -- typically we don't giving a breakdown on profitability for 8''. In our internal data, we actually feel a little bit different. We have a different perspective than what you just comment. We actually feel fairly comfortable about our 8'' market positions.

I think the gap between us as a blended result compared to the peers, I can't comment our peers. But we believe there is also a matter of the scale and also the mix of the products. 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 customer, we believe we can continue to enhance our market position by bridging the gap. And I assume we are making good progress. And I've seen there's still some room and -- but I see we're fairly close to that.

Bruce Lu

Let me clear clarify this, because in the past when [Inaudible] was trying to list in China, the gross margin for the 8'' fab was disclosed at [Inaudible] at least for the [Inaudible]. That was somewhere around -- below the industry peer or even below the industry leader. But what Jason just mentioned is that the latest internal data suggesting that your age profitability is actually very competitive. Is that the right understanding?

Jason Wang

Yes, yes. If you look at all our overall 8'' operation, yes.

Bruce Lu

Understand. Okay. So the next question is regarding to the compound semi. 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 Company. Are you going to expand it or what's the key application? What's the target for your outcome on semi business?

Jason Wang

This is definitely an area -- important area for us. And we have devoted to this market, and we have been putting in our resources. And the technology development team are on the projects. I think the market has significant potential. And at this point, was due relative small at the beginning -- at the -- at an early stage of the business development. And -- but we remain pretty confident about that. The -- within the compound space, there are different market segments. And we are -- at this point, in the process decided some selected area that we believe we can be relevant. And so and once we have concluded that, we'll actually be able to share that with you. We're not going to go out to address the overall compound, but there will be selected area that we're going to be focused on. And focus on those area and continue executing our plans to make sure that we will be relevant within those space.

Bruce Lu

But [Indiscernible] you turned aggressive in terms of expanding your capacity for the compounds [Indiscernible].

Jason Wang

Giving the compound market outlook, I don't see in the capacity is a critical -- at a critical juncture yet. We have a -- we have a sufficient capacity to support our current activities. And once the demand requires additional capacity, we'll definitely aggressive pursue them. Yes.

Bruce Lu

I understand that. Thank you.

Jason Wang

Sure.

Operator

Next one, Frank Lee, HSBC. Go ahead, please

Frank Lee

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

Jason Wang

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

Frank Lee

Okay. Thank you. And I have just a follow-up question on I guess, the capex and capital intensity. Based on your CapEx for 2021 at 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? And I know you have an LTA for your P6, but just in general, should we be thinking at 30% as kind of a new norm or can you give us any kind of clues or indication of how we should think about this?

Chi Tung Liu

We don't really do capital intensity but in a way, we do monitor our profitability structures, you know, our affordability. But more importantly, as I -- Jason mentioned, we also relate it to customer engagement and our technology differentiation, etc. So we want to be a relevant player and customer can stick with young people for longer term. So all the CapEx is now really a pure capital intensity point-of-view. It is a combination of various reason.

Frank Lee

Okay. But I guess -- so there's no real target that we should look at in terms of what that capital intensity will 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

Think there's a boundary -- internal boundary. 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, we -- if we have money and we just spend it, it's not the case. We really have to protected by the customers risk mitigation methodology, as well as the future and longer-term corporate development plans. Even we can afford it, we may not do it depends on the customer's needs and customer engagement.

Jason Wang

So may I add --

Frank Lee

Okay. Thanks.

Jason Wang

So may I add. The capital intensity is more of the active fab measurements. The condition that we measure on is really -- we invested at the right time, at the right place, with right know, and with the right customers. So if we believe is 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 then release it. So the -- after the [Indiscernible] that's when we will be able to come back and measure that intensity issue. But the intensity was under the first level of consideration.

Frank Lee

Okay. All right, thank you very much.

Operator

Thank you. And we are taking the last question. The last one, Gokul Hariharan of JP Morgan. Go ahead, please.

Gokul Hariharan

Yeah, thanks. 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 UMC management look at -- look and assess the 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 -- how you develop comfort around that fact? And is there some book-to-bill or a non supported demand expectation that you monitor which you can share to give some comfort to the market also? Thank you.

Jason Wang

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 structure demands, 5G, EV, IoT. And those demand remain strong. And the -- we still have a significant unfulfilled demand within those segments. And while we are estimating the growth, the market is at 12% along with our current alignment with the customer, we've seen, we'd be able to outgrow that.

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

Gokul Hariharan

Okay. Thank you very much.

Jason Wang

Sure. Thanks.

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

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 ir@ umc.com. 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.