Logo of jester cap with thought bubble.

Image source: The Motley Fool.

United Microelectronics Corporation (NYSE:UMC)
Q2 2021 Earnings Call
Jul 28, 2021, 5:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome, everyone, to UMC's 2021 Second 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. And Mr. Lin, please begin.

Michael Lin -- Division Director of Finance

Thank you, and welcome to the UMC's conference call for the Second 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 second quarter financial results, followed by our President's key message to address UMC's forecast and the third 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 second quarter 2021 financial results.

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Thank you, Michael. I would like to go through the 2Q '21 investor conference presentation material, which can be downloaded from our website. Starting on Page 3, the second quarter of 2021, consolidated revenue was over the TWD50 billion mark to reach TWD50.91 billion, with a gross margin at 31.3%. The net income attributable to the stockholder of the parent was TWD11.94 billion, and earnings per ordinary shares were TWD0.98. Our utilization rate in this quarter remained at 100% plus for second quarter. And the wafer shipment in Q2 of 2021 was 2.44-million-inch wafer equivalent. Please turn to Page 4. Our quarterly revenue in the second quarter reached TWD50.9 billion, up 8.1%, helped both by the higher wafer shipment as well as increased ASP. Profit margin as a result increased to 31.3% or TWD15.9 billion.And overall net income attributable to the shareholder of the parent is 23.5% or TWD11.9 billion. EPS in Q2 2021 was TWD0.98. On Page 5, for the first six months of the year, year-over-year comparison, revenue grew by 13.1%, mainly driven by higher volume as well as better product mix and also higher ASP. However, it was somewhat dampened by the increased NT dollar exchange rate against U.S. dollars. Gross profit margin reached 29% for the first half of 2021 to TWD28.4 billion. And overall net income reached TWD22.3 billion or 22.8% margins. EPS for the first six months of the year is TWD1.83. For our balance sheet, our cash on hand is about TWD124 billion, including about TWD20 billion will be distributed to shareholders as cash dividend in mid of August. And total equity reached TWD240 billion, and the net asset dollar value per share is around $19.3.

On Page 8, our revenue breakdown by locations. Asia increased -- sorry, on page eight -- yes, Page 8. Revenue breakdown, Asia remained at 63% and Japan increased to about 7%, and the rest two regions remained somewhat unchanged. I'm sorry, on Page 7, therefore, I can skip the page earlier. ASP in quarter two increased by close to 5%. So back to Page 9. IDM represents 16% of the total revenue and Fabless is the rest of 84%. On Page 10, our Communications segment is 47%. Consumer is around 26%. So on Page 11, our overall revenue below 40-nanometer is around 38%, and 28-nanometer since it's running at 100% capacity utilization rate is around 20%, similar to that of last quarter.And our capacity -- total capacity table show some incremental increase, mainly for 12A as well as 12 times. And going forward, for third quarter, there will still be some debottleneck type of capacity increase for selected sets. So for Page 13, our capex for 2021. The budget remained unchanged to around USD2.3 billion. So the above is a summary of UMC's results for Q2 2021. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.

Jason S. Wang -- Co-President & Representative Director

Thank you, Chitung. Good evening, everyone. Here, I would like to update the second quarter operating result of UMC. Strong demand fueled by 5G adoption and digital transformation underpinned our strong performance in the second quarter. Our manufacturing facility is 100% utilization, while overall wafer shipment rose 3% quarter-over-quarter to 2.44 million, 8-inch equivalents. Revenue from 28-nanometer technology continued to grow sequentially, build by application incorporate into 4G, 5G smartphones, solid-state drive and digital TV. During the quarter, we continued our product optimization and cost reduction efforts, lifting our gross margin. We expect the strength of structural demand to sustain and support the continuous improvement of a blended ASP. As a result, the company's gross profit in the first half of 2021 surged 54.5% year-over-year to TWD28.4 billion. Looking ahead, we anticipate demand to stay robust in the third quarter, driven by megatrends such as 5G and EV. Supply tightness is expected to continue across 8-inch and 12-inch facilities. We foresee margin momentum to continue into the third quarter, supported by further product mix optimization, cost reduction efforts and productivity enhancements.

In addition, we expect the adoption rate of our 22-nanometer technologies will continue to gain traction, reflected by a pickup in customers' 22 product tape-outs in connectivity and display applications. We will also focus on further strengthening our leadership position in a number of specialty technologies, such as OLED display drivers, RF SOI and image applications. Moreover, we continue to take important steps to enhance our corporate governance and lead sustainability efforts in our industry. Earlier this month, five independent directors were newly elected to our company's Board of Directors, representing more than 50% of the Board seats and including two female directors. The company also announced its pledge to reach net-zero carbon emissions by 2050, as well as our commitments to work alongside our partners to reduce carbon intensiveness and rise renewable energy usage in our supply chain. UMC is dedicated to enhance our corporate governance as well as addressing climate change to build a sustainable environment. Now let's move on to third quarter 2021 guidance. Our wafer shipments will increase by 1% to 2%. ASP in U.S. dollar will increase by approximately 6%. Gross profit margin will be in the mid-30% range. Capacity utilization rate will be at 100%. Our 2021 cash-based capex will be budgeted at USD2.3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is coming from Randy Abrams, Credit Suisse. Go ahead please.

Randy Abrams -- Credit Suisse AG -- Analyst

Ok, Thank you. Congratulations on the continued improvement. First question I wanted to ask on your strategy for mature 12-inch and 8-inch. Last quarter, when you announced the expansion, it looked more tied to 28 and 40. So I'm curious if you have plans on available capacity to add for the more mature nodes for us on 8-inch?

Jason S. Wang -- Co-President & Representative Director

Well, the last time we announced the P6 is all centered with the 28-nanometer capacity with the option to upgrade to 22 in the future, OK? We -- in terms of the other notes, in addition to 28, we mainly focused on some of the limited broad space expansion. So it's rather limited on 40 as well as 50. In general, our strategy in the capex is we remain our disciplined capex philosophy, and from 2017. We always try to drive our sustainable structure profitability based on disciplined tax principle. So we have to align with our customer and as well as the market and giving our relevance in the marketplace before we're making that decision. At this point, we're more focused on the 28 technology at this time. For the -- in general, the 12-inch material node and 8-inch are facing our ROI challenges in capacity expansion investment. And we are looking for opportunity to work with our customers to overcome the challenges if possible. In the meantime, we will continue to enhance our productivity improvement and strengthen our value proposition to enhance the customer stickiness within those nodes. That's sort of how we address this.

Randy Abrams -- Credit Suisse AG -- Analyst

Okay. And I guess in talking like to overcome challenges, is it your view is just not the economics, like the return to invest on more mature 12-inch and just not many opportunities to find 8-inch space? Is that more of the issue or just more of the view market demand, more of your opportunities, 28 and 40? So that's where you'll put the investment?

Jason S. Wang -- Co-President & Representative Director

You're right. It's more of economics and the full space available. But for any greenfield capacity expansion, for the mature node, you are competing with a fully -- most likely, you're going to be competing with a fully depreciated capacity. Unless the demand is significantly important to the customer, but the economics -- if the economics stay the same, it will be very difficult to have a justified ROI. However, if the customer is willing to face those challenges together with us, we will definitely explore those opportunities.

Randy Abrams -- Credit Suisse AG -- Analyst

Okay. Great. That's helpful. Second question on pricing. It's getting another good...

Jason S. Wang -- Co-President & Representative Director

Excuse me. Hello?

Randy Abrams -- Credit Suisse AG -- Analyst

Hello?

Jason S. Wang -- Co-President & Representative Director

Yes

Michael Lin -- Division Director of Finance

Randy, you are breaking up. Yes, can you repeat your question?

Randy Abrams -- Credit Suisse AG -- Analyst

Okay. Yes. Okay. Sorry, I was cut out for a second. Okay. Yes, the second question I wanted to ask, if you could discuss your view on pricing from the higher base, where it's up nicely in third quarter. Do you expect it would continuously grow in fourth quarter? And if you have an initial view on 2022, the pricing, if you've said anything or even for the new phase, the Phase five expansion if you get higher price? And then do you have a target like where gross margin factoring the pricing you're seeing where the potential gross margin could move toward?

Jason S. Wang -- Co-President & Representative Director

Well, we typically don't provide any guidance beyond the quarter. So we definitely will address the Q4 guidance during the Q3 conference. But in general, it's our belief that pricing for structural demand is here to stay. And I also believe our customers start recognizing the UMC value and award our contribution. So we do expect the strength of structured demand -- momentum will sustain beyond the Q4 2021.

Randy Abrams -- Credit Suisse AG -- Analyst

Okay. And just one last follow-up. Looking out to 2023, since you announced your expansion, like a number of foundries are also seeing that need and adding capacity, do you see by '23 -- you're contracting in to fix it. But do you view by '23, a change in that kind of structural, at least or maybe cyclical, more supply and at that point, kind of pricing goes back to the normal kind of some erosion? Or how do you see it looking out two years as some of these Fabs come online?

Jason S. Wang -- Co-President & Representative Director

Well, again, I mean we're not here to predict the -- about the nature of this industry. But in general, a new greenfield Fab will take more than two years to build, right? Just like you said, we're not looking at this tightness situation to get relief until 2023. And however, based on the industry research, the worldwide semiconductor market growth rate will actually accelerate all the way from 2020 to 2025, driven by the 5G digital transformation, HPC, EV and IoT. And so we do believe this up cycle will continue for a period. Of course, we can never guarantee 100% back loading in all the time. From the financials perspective, we have to maintain an edge in cost competitiveness to ensure the healthy gross margin, so that allow UMC to weather the storm during the downturn. So from that standpoint, we have to address this fundamentally, OK? And in order to address this -- maintain such healthier ASP or gross margin, let's say, what we do is from the recent up-cycle, we take the opportunity to optimize our product portfolio, enhance our technology competitiveness, and with -- along with our manufacturing capability. And we believe those efforts can strengthen our relationship with the customer and UMC's market position to maintain the current position. So I'm not here to predict whether we can approach this ASP continuously. But I do think by enhancing our capability, we'll be able to compensate the market volatility or even potential capacity oversupply situation. Randy? Randy, I think we lost you again.

Randy Abrams -- Credit Suisse AG -- Analyst

Yeah, Thank you.

Operator

Thank you, and next question is coming from Brett Simpson, [Indecipherable] Research. Go ahead please.

Unidentified Participant

Yeah, thanks very much. I wanted to ask about some of the long-term agreements you're signing. And what sort of commitment, wafer commitment guarantees are being negotiated? And how enforceable these agreements are, particularly if we see industry conditions start to normalize after this unusual period of supply challenges? Anything you can share with us around the enforceability of any sort of wafer commitments that your customers are making here long term? Thank you!

Jason S. Wang -- Co-President & Representative Director

Well, the -- we reported last quarter, the agreement has a long-term protection mechanism to ensure the -- our newly expanded capacity will be maintained at a healthy level. The -- such mechanism includes the mutual obligations from customers as well as from our side. And so by fulfilling those obligations, we believe that the loading can be sustained at a healthy level. As far as the detail of the mechanism, I'm not elaborate to share on the call, but I -- but we have -- we actually have a very serious and comprehensive discussion with our customer, and we do believe such mechanism is adequately adopted.

Unidentified Participant

And so even if we have a sudden change in industry conditions, you feel quite confident that your customer obligations will be -- they will continue to commit to those obligations, basically if there's an oversupply situation in the industry or something that we see in the years to come?

Jason S. Wang -- Co-President & Representative Director

Yes, we believe it will be well protected from a financials -- potential financial implication.

Unidentified Participant

Great. Great. And just one follow-up on dividends. Now that you're delivering healthy free cash flow, healthy margin -- improvements in margins, can you talk a bit about the vision around dividends? And how to think about returns to shareholders? I mean we haven't had a sort of formal policy from UMC. Is it a payout ratio you look to target in terms of your dividend policy? Any thoughts there around? As you continue to sustain this type of margin structure, how the dividends might evolve going forward?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Yes. We do have a dividend policy, which is we will pay our distributable earnings in cash, no less than 50%. So that's our policy. Of course, for the recent years, we are much higher in terms of payout ratio. But I think going forward, we're looking to distribute a stable and hopefully increasing cash dividend along with our improved EPS.

Unidentified Participant

Great. And maybe just one final question. In terms of your implied Q3 -- the Q3 guide implies your wafer pricing is up high teens year-on-year. Does the current ASPs fully reflect your long-term agreements that are in place?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

The long-term agreement won't kick in until 2023, if you are referring to the P6 project. I think our ASP increase is mainly driven by our product mix optimization in quarter 2. And there will be some price increase as well as product optimization continue into quarter 3. So the long-term contract for P6 won't be effective until 2023.

Unidentified Participant

Ok, Thanks very much.

Operator

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

Charlie Chan -- Morgan Stanley, Research Division -- Analyst

Thanks for taking my question, good afternoon gentlemen and Congratulations for great results. So I also really want to follow up some questions about the pricing. So just a hypothetical question, right? If there is a kind of a cycle downturn, how confident that management can maintain the current wafer price? I'm not talking about the P6. I'm talking about other than P6, whether companies think that price can sustain in the down cycle?

Jason S. Wang -- Co-President & Representative Director

Well, I mean we are giving guidance for 2021. So we don't think there's any inflection point of the down cycle yet. So the -- for a hypothetical question going into, let's say, 2023, 2024 for whatever reason, there is a so-called down cycle. We just have to execute in our plan, like I mentioned earlier, to Randy's question. There's a lot of activity associated with that. So I don't really think this is the right time to predict whether this is going to be a down cycle or not, but we are definitely prepared to dealing with those situations. So our technology offering to our manufacturing capability as well as based on the selected market that more associated with the structural demand. And we believe those activity will help us with our -- the vulnerability in terms of demand change. I think that's how we address that issue. And we -- of course, again, I'm saying that we can't really guarantee there's always up-cycle. But given what we have seen in the recent up-cycle, we already took those opportunities to optimize our product portfolio and along with enhancing our technology competitiveness to align with our customers. So we are seeing a good progress on that front.

Charlie Chan -- Morgan Stanley, Research Division -- Analyst

Okay. Yes, so when you form your wafer price, no matter for this year or 2022, do you really compare or refer to your industry peers, especially the so-called industry leader, TSMC? So my question is actually, do you see, for example, at the 28-nanometer or 40-nanometer, do you see any technology gap or quality performance difference versus TSMC? And whether you can price on par or even higher than TSMC? Thanks.

Jason S. Wang -- Co-President & Representative Director

Well, we do believe we are competitive in those technology nodes, process nodes. In fact, we'll continue driving our technology offering to enhance those areas, in particularly on the high-v, RFSOI, the BCD and better fresh area. We'll continue to strengthen our offering in the technology area. So I think we are reasonably competitive in those space, not if we are in the leading position. So as far as for the price ASP goals, we do believe that customer start recognizing that and start reflecting -- the ASC starts reflecting some of our technology offering and competitiveness. And we've seen the market price -- industry marketplace is a good reference, and we'll continue to benchmark those and we think we are already bridging the gap and into a comfortable level. Yes.

Charlie Chan -- Morgan Stanley, Research Division -- Analyst

And then some of housekeeping question, right? I mean I'm not sure what was the progress of your China Xiamen Fab, right, because previously, there were some chatters about there is some difficulty for China to import some equipment's, for example, AP2 from applied materials. Do you think that would affect your capacity expansion plan in China for 20-nanometer? And also the question to Chitung is about, from here, right, your gross margin is around mid-30%. What is the company's long-term financial goal in terms of gross margin, OP margin and ROE? Thanks.

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

So for 12-inch in Xiamen. Our Xiamen 12-inch wafer fab, we actually have already reached the full scale of 26.5k per month based on our design capacity. So pretty much we reached what we intended to expand for Xiamen fab already. For our GM question, the GM outlook, our CEO, our President, will comment on that.

Jason S. Wang -- Co-President & Representative Director

For the gross margin outlook, our gross margin outlook will be mainly derived from our production efficiency as well as the ASP trend. UMC as the company will continue to work on the product mix optimization. I kind of touched that earlier and continued efforts on cost reduction efforts and operational efficiency in order to strengthen our structural gross margin. So we do have expectations that continue to improve us, yes.

Charlie Chan -- Morgan Stanley, Research Division -- Analyst

Ok thats great, thank you.

Operator

And next question, Roland Shu, Citigroup. Go ahead please.

Roland Shu -- Citigroup Inc -- Analyst

Hi, good afternoon. Thanks for taking my question. Now your 28-nanometer is the biggest node in revenue. I would like to know how about the -- does that 28-nanometer is contributed to the upside to your total profit? And also for your 45-nanometer, the revenue actually continued declining from 3Q last year. And is there any empathy or idle capacity for 45-nanometer? Or are you convert this 45-nanometer capacity to 28-nanometer or others? That's my first question.

Jason S. Wang -- Co-President & Representative Director

Yes. All our nodes are actually fully loaded. And keeping a different mix of wafer out in different quarters, you will see some variables in the mix of the technology node. By this time, there is no vacancy in the fab. In fact, all nodes are running over 100%. The question about the 28 expansion going forward for the -- to the gross margin. And our unique 28 logic and specialty technology offering will enhance the customers' competitiveness. As a result, as in the customer's reliance on our 28 capacity is in great demand. This competitiveness will allow us to enjoy a healthier EBITDA margin in the longer term. In the longer term, we actually expect the 28-nanometer capacity expansion will play as a catalyst to further drive our gross margin expansion.

Roland Shu -- Citigroup Inc -- Analyst

Understood. So even for your 3Q gross margin guidance, mid-30 percentage points, did also have a big contribution from 28-nanometer?

Jason S. Wang -- Co-President & Representative Director

Yes, the ASP in Q3 guidance, the ASP is expect to grow 6% quarter-over-quarter, primarily driven by price adjustment. In our Q2, the ASP increase is mainly driven by both the price adjustments on the select application in 12-inch in a mature site and as well as 8-inch, and also coupled with the product mix improvement, which means the higher 28 shipments. For Q3, our expected AC growth primarily driven by the price adjustment of 12- and 8-inch nodes.

Roland Shu -- Citigroup Inc -- Analyst

Understood. Okay. Yes. But I think my question actually is for the gross margin for 28-nanometer. How does it contribute to your gross margin in 3Q?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

So Roland, we have mentioned that 28 has no doubt the higher EBITDA margin compared to the other main nodes, mainly because of higher ASP. And all the dynamics -- the parameters are dynamic quarter-over-quarter. So we cannot give you a straightforward answer. But as Jason just mentioned, for the longer term, 28 for sure will be a catalyst in driving our margin expansion.

Roland Shu -- Citigroup Inc -- Analyst

Understood. Thanks. If I look at your annual report, at least your contract with [Jinhua] was due in May. So I would like to understand, will there any impact on your P&L or on your balance sheet from 3Q or on after this contract has been built in May?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

So for the contract, it has been currently on hold, OK? So there's not any progress at all for these Jinhua-related activity. So no...

Roland Shu -- Citigroup Inc -- Analyst

So no financial impact as well, right?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Yes

Roland Shu -- Citigroup Inc -- Analyst

Okay. Thank you. Okay. And also, now you have been node -- every node of your capacity at more than 100% utilization. However, given in the past several quarters, every quarter, you still manage to increase the capacity by several percentage points or by capacity debottlenecking. So I just want to know how long can you still debottleneck your capacity going forward? And will it be sustainable for you to increase this 2% to 3% or even several percent despite of the wafer shipment increase every quarter from capacity debottlenecking, even though you are not at very high utilization?

Jason S. Wang -- Co-President & Representative Director

Well, debottlenecking and the productivity improvement is ongoing efforts that will continue. And for the capacity expansion is you're referring to the overall results here, our 2021 increased about 3%, right? And for the 2022, we expect to increase by another 6% year-over-year. So that's going to be a new expansion. And all the debottlenecking and the productivity improvement will be on ongoing basis.

Roland Shu -- Citigroup Inc -- Analyst

Ok, ok thank you, Yeah thats all my questions. Thank you.

Operator

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

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

Oh hi (Indecipherable) gentlemen. First question regarding P6. Initially, it's targeting the 28 and 22 nano. I just wondered if the capacity will be upgradable to a 14-nano or FinFET?

Jason S. Wang -- Co-President & Representative Director

The answer is yes. The both nodes are flexible to manufacture for 14, Yes.

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

Okay. Great. And how easy would that be for the upgrade? And how much would it cause roughly on a per K basis?

Jason S. Wang -- Co-President & Representative Director

Well, the number is -- actually, we -- I don't think we're ready to quote that number because the -- I said the number -- there's still some uncertainty with the numbers. But the comment on 28, the both to the 40 things that are in a high percentage range. So we do believe that is the right node for a potential upgrade. And since we're not there yet, whether we serve the specific number at a later time.

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

Okay. Great. Yes. No worry. And regarding the FinFET, what's the company's latest thoughts on that part of business?

Jason S. Wang -- Co-President & Representative Director

Again, I didn't get that number.

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

What's the company's strategy for the FinFET going forward?

Jason S. Wang -- Co-President & Representative Director

Oh. Well, I mean when we developed the technology, the -- actually, when we see the capacity expansion on 14 a few years back, but we did not see the technology development on the 14 for the reason I mentioned earlier. Means the 14 and 28 is still at a high percentage of conversion ratio. And also, the 14 does provide some technology advancements in terms of power and the savings. So we believe that's the right technology to continue develop. So at this point, the 14 has been fully developed. However, we are aligning with our customer and -- to triggering the capex decision. Given the current market outlook, the 28 remains to be a strong node. So we still prioritize our resource on the 28 at this time. So the option is there, but it's still subject to our, like I said, the capex policies. So we'll continue guided by that at the right time, at the right place and the right volume, we'll make that decision. So the 14 is an option for us.

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

Okay. Great. And my second question is regarding the profitability of your Japan Fab. And how does it compare with the group average right now?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

So based on the integration effort at 12-inch, which saw Japanese Fab, the cost reduction activity and productivity improvement has led to a very efficient operation enhancement. Therefore, we do expect the 12-inch Japanese Fab gross margin will be in line with UMC's 12-inch corporate average.

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

Ok great. and yeah congratulations, thanks for answering my question.

Operator

Thank you. And next question is from Nicolas Barrett, Macquarie. Go ahead please.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Yes, hi. Could I clarify if I heard properly, Mr. Wang. Capacity, this year increased by 3% and next year, 6%. Was this correct?

Jason S. Wang -- Co-President & Representative Director

The capacity increase for 2021, this year, is 3%. That's the year-over-year for 2021. The 6% year-over-year is for in 2022.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Thank you very much. The 6% is in 2020. Since you're running at 100% utilization, does that give you better visibility into the coming quarters?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Visibility for the next quarter, of course, it's quite solid. And we continue to work with our customers closely about their rolling forecast. So for the visibility right now, of course, I think it's better than most of the time we experienced in the past.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Would you say that gives you visibility into beginning of next year?

Jason S. Wang -- Co-President & Representative Director

All right. Well, I mean the -- we do have visibility because given the recent supply and demand in balance situation, customers tend to have a longer-term discussion with us. So yes, the answer is, yes, we do have a visibility all the way strong now to end of 2022. But again, this is a dynamic -- market dynamics in there. So we have to continue tracking the market. Given the current observation, we do expect that demand will continue to outpace the supply, driven by the mega trend. So in the near term, we have not seen any sign of inflection point yet, as I said earlier. And so we don't see that any signal that indicates the current situation will change. So yes, we do have some visibility, and we haven't seen any signs of change in the situation and giving the mega trend of some of the applications from 5G to EV, IoT. We think this demand is going to stay here.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Okay. Understood. Maybe for Chitung, do you have an estimate for 2021 for this year about operating expenses and D&A?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Operating expenses for this year and next year, it's under control. I think our goal is really to maintain a steady percentage of ratio to overall revenue. And of course, revenue is continuing to grow. So the rate of revenue growth certainly is outpacing the rate of OpEx increase.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

The percentage OpEx not increasing. No, I'm asking because typically, as you mentioned, 22, tape-out and specialties processes and, at the same time, a bit more capacity increase than in the previous years, right? All those things cost a bit of money, I guess?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Yes, definitely. But we all have more resources as well given the stronger performance. So again, we will control the ratio as a percentage of OpEx to revenue instead of the absolute dollar terms.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Understood. And for D&A, Chitung, any rough number?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Same thing. I think the biggest component for expense increase is really the employee-related compensation. Because of the better performance, the bonus improvement to our employee will be higher. But the rest, again, is under well control.

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Thank you very much

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Thank you

Operator

Next question, Gokul Hariharan, JPMorgan. Go ahead please.

Gokul Hariharan -- JPMorgan Chase & Co -- Analyst

Yes.Congrats on the good results. First question, I just wanted to explore a little bit on the blended pricing. Seems like ASP continues to accelerate roughly 3% in Q1, 5% in Q2 and 6% in Q3. Is there an updated guidance on how much we expect blended ASP to go up this year? I think previously, we talked about high single-digit approaching 10% last quarter. Is that going to be higher? And secondly, on the pricing itself, given that you have visibility into next year and you have a lot of commitments to the end of next year itself, could we talk a little bit about how we think about blended ASP as we go into next year? Is next year also a pretty strong price increase year because of product mix or so less on price adjustments? That's my first question.

Jason S. Wang -- Co-President & Representative Director

Okay? So in 2021, our targeted ASP growth will be around 10% to 13% year-over-year. The pricing also includes our product mix improvement, pricing adjustment. UMC does value long-term partnership over near-term cyclical patches. So therefore, our current ASP mainly reflects the value of our position right now. In terms -- beyond 2021, I kind of touched that earlier, the pricing of the structural demand, we believe, is here to stay. Our customers does recognize that. So we expect the strength of structural demand momentum will sustain beyond Q4 2021.

Gokul Hariharan -- JPMorgan Chase & Co -- Analyst

Got it. Just one more question on the capex side. I think when we talk about the TWD2.3 billion capex this year, how much of our Fab 12A P6 expansion does it cover? Given that we are also looking for around 6% capacity addition next year, do we expect capex to stay around these levels as we look into next year as well?

Jason S. Wang -- Co-President & Representative Director

About the -- we announced the P6 program will be somewhere in the TWD [3.7] billion capex and the estimated rent schedule will be sometime in the second quarter of '23. So most of those will probably happen within the 2022. There is a very minimum portion of that is within the 2021 number. So I think that provide will that -- we will provide that guidance by end of this year for 2022.

Gokul Hariharan -- JPMorgan Chase & Co -- Analyst

Understood. Given -- maybe one more question. Given that we are seeing a lot of tightness in -- especially in 8-inch and as you mentioned, pacing on ROI challenge in terms of capacity expansion also. Could we talk a little bit about how quickly or how keen are customers to migrate some of their 8-inch products to more mature 12-inch technologies? And also given everything is tied, how feasible is it for them to do that over the next, let's say, six to 12 months?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Well, just like you mentioned, the -- all nodes are tight across some 8-inch to 12-inch. So the migration -- if the migration -- the purpose of migration is to add this to additional capacity in 12-inch that will be very challenging. The natural pace of the migration will continue, I think, on different applications. Those activity is ongoing. But for capacity reasons, I think, this is going to be rather challenging at this time because all nodes are very, very tight right now.

Gokul Hariharan -- JPMorgan Chase & Co -- Analyst

Understood. Just last one. When you talk about the 6% capacity increase next year, is that also largely in 28 and 22? Or are you thinking a little bit more on 40, 55, et cetera, also?

Jason S. Wang -- Co-President & Representative Director

The breakdown of the 22 mainly is still led by more than 20% year-over-year growth in our 28 nanometers, OK? There will be some increase in the 8-inch advanced node, which means below 0.18 through some of the upgrades. So this is probably a combination of those, are the main nodes.

Gokul Hariharan -- JPMorgan Chase & Co -- Analyst

Got it. Thank you and congrats on the (Indecipherable) results.

Jason S. Wang -- Co-President & Representative Director

Thank you

Operator

Next question, Bruce, Goldman Sachs. Go ahead please.

Zheng Lu -- Goldman Sachs Group, Inc -- Analyst

Ok, thank you for taking my question. Congrats on the group results, and I'm actually very impressed about your ESG improvement, especially more than half of the Board of Directors are independent directors, which is important for the long-term shareholders. So I noticed that for the last two quarters news announcement, you addressed a lot of -- you addressed the automotive. Can you tell us what is the revenue exposure to automotive right now? And what's your target in two to three years? What are the key applications and the process node for the automotive customer? Do they carry higher or lower than corporate average margins?

Jason S. Wang -- Co-President & Representative Director

Our revenue contribution from automotive is very, very small. They're still below 10% mark. And there are the demand recovery issue from end of 2020 on automotive. So we are putting some resource to support that and ability to support that. And from year-over-year standpoint, we increased the absolute number probably by close to 20% in the auto segment. So we are putting some priority and resource to support that urgent need. So as far as the customers margin goes, we don't comment on specific customer or segments margin and whether on a corporate level. So I think in general, they are reasonable -- in a reasonable ASP level.

Zheng Lu -- Goldman Sachs Group, Inc -- Analyst

Okay. So can I ask in a different way that can we expect automotive revenue to be more than 10% in a year or 2? And what are the key applications within that auto segment in your -- for your customers?

Jason S. Wang -- Co-President & Representative Director

I think from the application standpoint, we are putting more resource to the automotive space. So we are expecting the automotive space will grow. So -- and I don't have a number to quote it here. And we can provide that on an ongoing basis.

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

But just to add on that, we mentioned EV is an important driver for our silicon content going forward. So we would like to take a broader view that auto industry should eventually include the EV as a driver as well. So that percentage certainly is likely to continue to increase.

Zheng Lu -- Goldman Sachs Group, Inc -- Analyst

Okay. So next one. I always like to ask your R&D expenses. I mean if you look at your R&D expenses in the first half, it's already like 6.5%, which is down from like 8% to 9% in the last couple of quarters. So basically, what is the long-term target right now? I mean [Indecipherable] R&D expense is 5.5% of the sales. Is that a reasonable target for your R&D expenses?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

We think the current R&D expenses is about right. I think, certainly, we want to allocate more resources to our R&D effort in order to differentiate ourselves, especially on the specialty technology and also the future technology related to 5G and EV. And again, the absolute dollars will continue to grow. But certainly, the percentage of revenue will be well controlled.

Zheng Lu -- Goldman Sachs Group, Inc -- Analyst

I see. Okay. Lastly, for the P6 profitability, I remember last time when management was talking about, which is like roughly a 30-plus percent gross margin for P6. But if we fast forward to 2022 and 2023, this gross margin will be lower than the corporate average in a meaningful way. So that sounds right?

Jason S. Wang -- Co-President & Representative Director

Well, we expect that P6 will have a better cash margin, means higher EBITDA margin than the 12-inch corporate average. And we adopted P6 because we believe this is a win-win collaboration model that not only secured long-term capacity for customer, the predetermined pricing will also enable UMC to grow organically and to meet our long-term profitability. Well, given the -- our corporate average gross margins on rise, the initial P6 gross margin will be in catch-up mode, like you said. However, over time, the P6 will -- gross margin will eventually enhance our corporate average.

Zheng Lu -- Goldman Sachs Group, Inc -- Analyst

I see. Understand. Your corporate average gross margin improvement is much faster than we think, so that's why it creates some discrepancy, though. Okay. Thank you

Operator

Next question is from Nicholas [Indecipherable], UBS. Go ahead please.

Unidentified Participant

Hi good evening (Indecipherable) 2 quick questions. First, going back to LTAs. Is there a way you could quantify perhaps for us how much of the expected capacity for P6, which I think is 27,000, 28,000 wafers per month will eventually be covered by LTAs? And secondly, going back to specialty processes. Could you maybe give us more color in -- as to which ones you see better traction of customers right now between low power or embedded memory, MCUs, high voltage, CIS, et cetera?

Jason S. Wang -- Co-President & Representative Director

The application strength from the overall global demand perspective and within the application, the catalyst is really more of a 5G transformation. And of course, we mentioned about EV and as well as the digital transformation on the IoT devices. And for the 5G transformation associated with the high-voltage device has probably the strongest momentum. That includes OLED driver. And the 5G also have ISP, WiFI6, RF Switch. So those will be probably the -- has the strongest momentum at this point due to the 5G mega trend, and followed by the MCU and the power management.

Unidentified Participant

Great. Thank you. And how about the LTA question for P6, please?

Jason S. Wang -- Co-President & Representative Director

For P6?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Can you repeat your question?

Unidentified Participant

Sure. So when you talked about customer signing LTAs for P6, approximately when you look ahead and when you will reach 27,000, 28,000 wafers per month in P6 capacity? How much about do you think is likely to be covered by LTAs? Thank you.

Jason S. Wang -- Co-President & Representative Director

The OP6 program is covered by the contract, yes.

Unidentified Participant

Great thank you very much.

Operator

And next question, [Indecipherable], UBS. Go ahead please.

Unidentified Participant

Hi, Thank you. I would just like to ask the management to give us a -- maybe a long-term gross margin target. It is just because the recent quarters, your gross margin has been improving quite fast in a very rapid pace and perhaps give us a guideline of a long-term target, this margin improvement?

Jason S. Wang -- Co-President & Representative Director

We -- I kind of touched that question through ASP trend, but the question always came back to the gross margin. Our gross -- our margin outlook is mainly driven by all those factors I mentioned, from production, efficiency, ASP and product mix optimization, cost reduction and so on and so forth. So we believe those will give us this benefit to strengthening our structural gross margin. So we do expect this gross margin probably continue to improve, I would say. But I'm not -- I don't think we are ready here to giving any gross margin guidance or any gross margin, the outlook for the -- for our target, yes.

Unidentified Participant

So in a way we should view that the possible upside could still be there? Or the recent quarters margin is not sustainable?

Jason S. Wang -- Co-President & Representative Director

We certainly believe the -- all the structure demand, all the existing environment is here to stay. So I don't think there's -- in the near term, we haven't seen any reflection point that this will change in a different direction. I think from the -- direction is we're still marching to improve our gross margin, yes.

Unidentified Participant

Got it. And then also a follow-up. How do you run utilization rate at more than 100%?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Well, it's actually 100%. Just 100% plus is meaning it's really full. So it is not, yes.

Unidentified Participant

Alright, thankyou and congrats for good results.

Operator

Ladies and gentleman, we're taking the last one. And the last question is from Randy Abrams, Credit Suisse. Go ahead please.

Randy Abrams -- Credit Suisse AG -- Analyst

Ok thank you for squeezing me. Two final questions. Depreciation, Chitung, could you give an update the trend for the next one to two years? Now on the new capex plan, how we should -- would factor that in?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

I think for this year and next year, we are talking about 0 to five -- below -- around 5% or less decline for our overall depreciation expenses. And for 2023, it really depends on the equipment we brought online. And right now, the lead time is actually quite long. So it's a little bit difficult to predict the depreciation expenses for 2023. However, again, we will control it through a percentage of revenue benchmarks. And percentage-wise, we hope it will be a steady to decline rate. But the absolute dollar term depends on the new capacity come on stream.

Randy Abrams -- Credit Suisse AG -- Analyst

Okay. And the other one I wanted to ask, the other income bumped back up to TWD1.6 billion. Was there a factor for that lift? And then looking forward, does that -- is there a certain period that continues? Is that still tied to the Xiamen? And how would that continue out into the future?

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Just once a year, there's extra subsidies related to our syndicated loans. And I think that will be the last time for this second quarter. Going forward, I think around TWD10 billion per quarter will be a norm for each quarter, at least, for a few years.

Randy Abrams -- Credit Suisse AG -- Analyst

Okay. I'm sorry, say that again. It was...

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

TWD one billion per quarter.

Randy Abrams -- Credit Suisse AG -- Analyst

TWD one billion per quarter.

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Yes. Per quarter, TWD one billion.

Randy Abrams -- Credit Suisse AG -- Analyst

Ok great thats all my questions.

Operator

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

Michael Lin -- Division Director of Finance

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

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Michael Lin -- Division Director of Finance

Qi Dong Liu -- Chief Financial Officer, Senior Vice President, Head of Corporate Governance & Company Secretary

Jason S. Wang -- Co-President & Representative Director

Randy Abrams -- Credit Suisse AG -- Analyst

Unidentified Participant

Charlie Chan -- Morgan Stanley, Research Division -- Analyst

Roland Shu -- Citigroup Inc -- Analyst

Szeho Ng -- China Renaissance Securities (US) Inc. -- Analyst

Nicolas Guy Gabriel Baratte -- Macquarie Research -- Analyst

Gokul Hariharan -- JPMorgan Chase & Co -- Analyst

Zheng Lu -- Goldman Sachs Group, Inc -- Analyst

More UMC analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.