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|United Microelectronics Corporation |(UMC-NYSE) |$3.32 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q07 Earnings Update Previous Edition: March 20, 2007

Recent Events

On May 2, 2007, UMC reported financial results for the quarter ending March 31, 2007. Highlights are as follows:

• Revenue was $694.2 million in 1Q07.

• Pro forma EPADS was $0.012 in 1Q07.

Further details will be provided below.

Overview

United Microelectronics Corporation (UMC, United, or the Company) based in Hsinchu City, Taiwan is the second largest player in the foundry space. The Company's primary business is the manufacture or fabrication of semiconductors, also referred to as chips or integrated circuits (ICs). UMC delivers cutting-edge foundry technologies that enable sophisticated system-on-chip (SoC) designs, including volume production 90nm, industry-leading 65nm, and mixed signal/RFCMOS. UMC's 10 wafer manufacturing facilities include two advanced 300mm fabs; Fab 12A in Taiwan and Singapore-based Fab 12i are both in volume production for a variety of products. UMC led the development of the commercial semiconductor industry in Taiwan and was the first local company to offer foundry services, as well as the first to list on the Taiwan Stock Exchange in 1985. The Company currently has approximately a 3,000,000-wafer-per-year (8” wafer equivalent) manufacturing capacity, and employs approximately 12,000 people worldwide and has offices in Taiwan, Japan, Singapore, Europe, and the United States. UMC’s website is .

Analysts have identified the following factors for evaluating the investment merits of UMC:

|Key Positive Arguments |Key Negative Arguments |

|UMC has made significant progress with the 90 nanometer (nm) processes. |UMC is lagging its peers in the 0.13 um category. |

|It is the second largest player in the foundry market. |UMC is subject to market risk as well as geopolitical and company-specific|

|The Company generates substantial cash flow from operations. |risks. |

|Inventory issues in leading-edge chips projected to help raise ASPs going |The overhang related to the Hejian fab-UMC partnership could keep the |

|forward. |stock price weak in the near term, according to a number of analysts. |

|UMC is shifting some of its manufacturing operations to Singapore to |Taiwan experiences earthquakes, which could seriously afflict operations. |

|reduce earthquake-related risks. |The shift to 300mm wafers, along with 90nm processes, which include both |

| |copper and low-k dielectric material, poses a significant yield issue. |

| |UMC’s inability to resolve such yield issues on time and comply with |

| |customer requests could have a direct adverse impact on its revenue and |

| |market share. |

Using its own proprietary processes and techniques, United makes chips according to the design specifications of customers and manufactures several semiconductor memory products based on customer specifications and is primarily engaged in wafer fabrication for foundry customers. To optimize fabrication services for customers, it works closely with clients as they finalize circuit design and contract for the preparation of masks to be used in the manufacturing process. United also offers customers turnkey services by providing subcontracted assembly and test services. The Company continues to build capacity at its 300mm facilities and expects performance in the consumer market to remain stable throughout 2007 on the strength of DVDs, LCDs, and MP3s. The computing market is also expected to improve going forward, as the effects of seasonality wear off.

NOTE: The Company’s fiscal year ends on December 31.

Revenue

|In US $ million |

|Computer |18.0% |

|Communication |56.0% |

|Consumer |24.0% |

|Memory |1.0% |

|Others |1.0% |

Revenue by Region: Revenue from North America accounted for 47% of total revenue in 1Q07, down from 53.0% in 4Q06, Asia-Pacific revenue grew to 43% of total revenue in 1Q07 as demand in the region was described as relatively stronger than in North America, and the contribution of Europe and Japan to total revenue remained flat sequentially, according to analysts.

|Revenue by Region |

|North America |47.0% |

|Asia Pacific |43.0% |

|Europe |7.0% |

|Japan |3.0% |

Outlook

For 2Q07, the Company guided a 6%-8% sequential increase in revenue (6%-8% sequential increase in shipments and flat ASP) and a slight improvement in profitability. Revenue from 90nm is expected to comprise about 20% of the mix. UMC expects the utilization rate to rise to 75% in 2Q07 from 74% in 1Q07 and also indicated that revenue and profit could increase significantly from 3Q07, underpinned by the anticipated strong customer production ramp-ups starting in June 2007 at the communication (handset) and consumer (DTV and driver ICs) segments. UMC also mentioned that it would diversify into other product areas, such as CPUs and memory.

According to one analyst (Bears Stearns), the strength in 2Q07 will be driven mostly by the communications segment, followed by the consumer and computer segments. The analyst believes Mediatek and TXN would probably be two of the largest customers in the communications segment in 2Q07.

Management noted that meaningful production volume growth of 65nm will not occur before 2008.

Please refer to the separately saved spreadsheet on UMC for more details.

Margins

|Margins |

|Positive |30.8% |

|Neutral |61.5% |

|Negative |7.7% |

|Digest High |$4.20 |

|Digest Low |$2.40 |

|Avg. Target Price |$3.40 ↓ |

According to analysts, risks to achieving the target price include sluggish end-market demand; slower-than-expected margin improvements; excess inventory build at customers; forex fluctuations; uncertainty over non-core investments; high-end foundry competition from IBM, Samsung, TSMC, and Japanese IDMs; and low-end foundry service competition from Chartered and China foundries.

Metrics detailing current management effectiveness are as follows:

|Metric (ttm) |Company |Industry |S&P500 |

|Return on Assets (ROA) |6.26% |11.43% |8.10% |

|Return on Equity (ROE) |7.84% |15.15% |20.44% |

|Return on Investment (ROI) |6.95% | 13.91% |12.00% |

Capital Structure/Solvency/Cash Flow/Governance/Other

Capital Structure

The net cash outflow was NT$2.41 billion in 1Q07. Operating cash inflow was NT$9.73 billion, a NT$4.59 billion sequential decrease, which reflected soft business in 1Q07. The investing cash outflow primarily reflects the NT$12.52 billion of capex in 1Q07. The NT$188 million of financing cash inflow was attributed to the exercise of employee stock options. Over the next 12 months, UMC expects to repay NT$2.25 billion in corporate bonds.

UMC expects to spend US$1-$1.2 billion in capex in 2007, with 81% of the capex spent on 12” fabs. It stated that capital spending is necessary to support the targeted capacity growth of 8% y-o-y, and the ramp up of advanced technology nodes in 2007. The capex budget for the full year remains unchanged at US$1.0-1.2 billion, of which was spent US$ 378 million in 1Q07.

Non-Financial Metrics

The increase in notes and accounts receivable reflects a one-time payment rule change for certain customers. Days sales outstanding increased to 50 days from 47 days in 4Q06, and average inventory turnover increased to 48 days compared to 47 days in 4Q06.

Capital Reduction Plan

As part of its capital reduction plan, UMC decided to reduce capital by US$1.74 billion and buy back 5,739,357,807 of its outstanding shares, which is equivalent to roughly 30% of shares outstanding. Shareholders will receive approximately US$0.456/ADS as a result of the capital reduction. The Company has determined that cash flow generated from future operations will be sufficient for the continued expansion of advanced manufacturing capacity, including second 300mm fab in Taiwan's Tainan Science Park.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Long-Term Growth

Three analysts (B. of America, Bear Stearns, Merrill) have provided a long-term growth rate of 20% each and one analyst (Needham) has provided a long-term growth rate of 5%. Analysts detailed that UMC is the second largest player in the foundry space and should benefit from growth trends in the foundry market. They believe the inventory corrections have been a significant positive development for the Company but excess capacity could weigh on profitability.

UMC expects 130nm to continue growing as a percentage of total revenue. Analysts believe this trend differs from other foundries that are having trouble keeping 130nm capacity full as 90nm scales production. UMC attributed its strength at 130nm to MP3s, DSC, and DVDs. The first priority for UMC is to increase capacity utilization as soon as possible to improve its profits. The continued progress of advanced technology is expected to help the Company further expand its customer base and increase its utilization rates. The Company believes that as long as it strategically times its capacity expansion projects, it will see economic rewards. It also believes that income from operations will account for the majority of revenue in coming years.

Upcoming Events

At the end of July 2007 UMC expects to release its 2Q07 earnings.

Individual Analyst Opinions

POSITIVE RATINGS (30.8%)

Daiwa – Outperform ($3.61) – 05/03/07 – The firm has maintained an Outperform rating with a $3.61 target price.

Goldman – Buy ($3.61) – 05/08/07 – The firm has maintained a Buy rating and a $3.61 target price. The firm remains positive on the UMC stock near term due to its capex reduction program and robust near-term outlook.

Lehman – Overweight ($3.60) – 05/04/07 – The firm has upgraded the stock from Equal weight to Overweight based on its positive near-term outlook and maintained the target price at $3.60. INVESTMENT SUMMARY: According to the firm, UMC will increase its client base in 2H07 and its recent capital reduction plan will help its financial performance going forward.

Merrill – Buy ($4.20) – 05/03/07 – The firm has maintained a Buy rating and a target price of $4.20 based on 20x U.S. GAAP EPS estimates and supported by long-term ROIC. The firm estimates that UMC will gradually improve its ROIC to 10%-15% over the next 1-2 years, and is on track to deliver an ROIC of 10% in 2007, which would encourage a potential valuation revision.

NEUTRAL RATINGS (61.5%)

B. of America – Neutral ($3.80) – 05/02/07– The firm has maintained a Neutral rating and the target price at $3.80. INVESTMENT SUMMARY: The firm expects a modest recovery in the last-stage global economic cycle, and expects single-digit growth for the foundry business in 2007.

Bear Stearns – Peer perform – 05/02/07 – The firm has maintained a Peer perform rating. INVESTMENT SUMMARY: Since the firm has not seen much improvement in UMC’s cost structure over the past few years, it remains cautious on the stock and has maintained a Peer perform rating.

Citigroup – Hold ($3.35) – 05/03/07 – The firm has downgraded the stock from Buy to Hold and decreased the target price from $3.75 to $3.35 based on the lackluster near-term outlook. INVESTMENT SUMMARY: Even though utilization recovery is on track for starting in 2Q07, the firm does not see near-term fundamental catalysts that would lead to greater than consensus results.

J.P. Morgan – Neutral ($2.85) – 05/02/07 – The firm has maintained a Neutral rating. INVESTMENT SUMMARY: The capital reduction program in 4Q07 may lead to short-term upside in share price, but the firm expects this to be limited by UMC’s slow progress on long-term profitability improvement. The firm continues to prefer TSMC in the foundry space. The downside key risk to target price is macroeconomic weakness.

MorganStanley – Equal weight ($3.31) – 05/02/07 – The firm has maintained an Equal weight rating. INVESTMENT SUMMARY: UMC is trading at mid-cycle valuation estimate of 1.3x with single digit RoE. According to the firm, the Company is likely to grow in line with the industry due to seasonal strength in 2H07. However, with low industry growth in FY07, the likelihood for share price out performance is limited.

Thomas Weisel – Market weight – 05/02/07 – The firm has reiterated a Market weight rating. INVESTMENT SUMMARY: Based on UMC’s No. 2 position in the foundry space and its strong IP profile, the firm considers UMC shares fairly valued, and reiterated a Market weight rating.

NEGATIVE RATINGS (7.7%)

Kintisheff – Sell ($2.40) – 05/03/07 – The firm has maintained a Sell rating and a target price of $2.40 to primarily reflect the anticipated impact of the expected 32% capital reduction plan of the Company.

Research Associate: Swati Poddar

Copy Editor: Joyoti D.

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May 22, 2007

Zacks Research Digest Research Associate: Swati Poddar, ACA

Editor: R.C. Fuhrmann, CFA

Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771: x9417

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