UMC’s Long-Term Oversupply Risks Loom Despite Strong Guidance; Shares Slightly Overvalued

We raise our fair value estimate on United Microelectronics Corporation to TWD 52. We maintain our view that the semiconductor market will cool in 2023 and 2024, but we have better visibility for 2022 involving better bottom line fueled by higher prices. Also, we are rolling our model to include a midcycle scenario into 2026 where structural demand, like Internet of Things and automotive, catches up and boosts gross margin a year into a potential oversupply in 2024. As a result, our sales and EPS forecasts for 2022 and 2023 are revised up by over 6% and 14% respectively, while 2024 and 2025 projections are little changed. After the stock plunged 6.8% Wednesday in Taiwan, partly due to management comments on a mild oversupply beyond 2023, we view UMC is slightly overvalued due to overoptimistic views on the help of long-term agreements, or LTAs.