UMC's FVE Affirmed due to Unchanged Long-Term Outlook; Company Warns of Softer Industrial Demand

We retain our fair value estimate for no-moat United Microelectronics, or UMC, at TWD 62 per share after adjusting capital expenditure assumptions for the next few years, among other minor model changes. UMC’s ADR price dropped 4% during Wednesday trading probably because of more cautious management comments on the first half of 2023. The stock is undervalued in our view as our fair value estimate is derived from sub-consensus (per Pitchbook) gross margin and EPS assumptions for both 2023 and 2024. While we are more wary of potential near-term earnings downside, we are more optimistic on how UMC benefits from secular growth in "Internet of Things" and increased OLED adoption. Still, we believe a better entry point is possible in the next few months since potential automotive chip weakness is yet to come.