UMC 联华电子

Operator

Welcome everyone to UMC's 2016 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After a presentation there will be a question-and-answer session. [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. Bowen Huang, Head of Investors Relations at UMC. Mr. Huang, you may begin.

Bowen Huang

Thank you and welcome to UMC’s conference call for the third quarter of 2016. I am joined by Mr. Po Wen Yen, the CEO of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our CEO's key message to address UMC's focus and the fourth quarter guidance. After that, there will be a question-and-answer session. UMC's quarterly financial reports are available at our website, www.umc.com, under investors' financial section. During this conference, we may make forward-looking statements based on management's current expectation 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 US and the ROC securities authorities. I would now like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's third quarter 2016 business results.

Chitung Liu

Thank you, Bowen. I would like to go through the third quarter 2016 investor conference presentation material which can be downloaded from our website. Starting on Page 3, the third quarter of 2016 consolidated revenue was NT$38.16 billion with gross margin at 21%. The net income attributable to the Stockholder of the Parent was NT$2.98 billion and earnings for ordinary shares were NT$0.24. And for the traditional rate this quarter and last quarter as well as the same quarter of last year was all around 89%. So on Page 4 it’s comparison against the previous quarter, revenue growth 3.2% to NT$38.16 billion and gross profit margin was 21.8% of NT$8.3 billion. With higher start-up cost from our Xiamen JV investment our OpEx has grown 8.8% to NT$6.3 billion and with impairment loss from one of our solar subsidiaries NexPower which come for around NT$450 million impairment loss in the third quarter. Net result for operating income was NT$1.48 billion or 3.9 percentage points and net income attributable to Stockholder of the Parent was NT$2.975 billion with EPS of NT$0.24. And for Page 5 it’s the comparison for the first nine months against the previous year. Revenue was basically flat with 1.3% decline year-over-year. Gross profit because of higher depreciation cost, gross margin dropped to 19.7% to NT$21.6 billion and operating expenses as we explained earlier for the third quarter, the start-up cost of our Xiamen JV has caused the operating expense to grow 16% year-over-year to NT$17.2 billion. So the net income for 2016 first three quarter was NT$3.4 billion with EPS of NT$0.47. On Page 6 is our simplified balance sheet, cash remained around NT$55.2 billion with our total stockholder equity around NT$2.19 billion. For operating segment report, new business has become insignificant or less than 2% of our total revenue. Majority of the financial result was contributed by our wafers application department and the segment revenue was NT$38 billion for third quarter of 2016. Blended ASP in the previous quarter grew by around 1%, against the previous quarter. In terms of revenue breakdown in the third quarter Japan and Europe still remained at lower level around 6% in combine with North America account for the biggest contribution of 52%. And IDM remained unchanged at 7% quarter-over-quarter and in terms of segment breakdown it’s also quite similar compared to the second quarter of 2016. We continue to see 28-nanometer our most leading edge revenue base continue to grow and in the third quarter, it reached 21% of the total revenue. Total revenue below 40-nanometer inclusive is around 48%. The incremental new capacity mostly coming from Xiamen in Q4, by year end we expect Xiamen JV will reach 6,000 wafers capacity by year end of 2016. We’ll also continue to see some increase of 40-nanometer capacity in our Singapore Fab 12i. And so far the CapEx number remain unchanged around NT$2.2 billion although the actual number may differ by year end we will report that accordingly in the next conference call. And that’s pretty much the wrap up for our third quarter performance. And I will like to now turn the call over to Mr. Yen, CEO of UMC.

Po Wen Yen

Thank you Chitung. Hello, everyone. I would like to update to everyone UMC’s third quarter operating results. In the third quarter of 2016, UMC’s foundry revenue increased 3.2% sequentially to NT$38.05 billion. Foundry operating margin was 5.5% as wafer shipments grew to 1.57 million to 8-inch equivalent wafers, with quarterly capacity utilization remaining at 89%. During the quarter our 28-nanometer business exceeded 20% of quarterly revenue for the first time, mainly driven by strong chip demand within the communications segment. Our new high in 28-nanometer contribution reflects customers robust wafer demand and our ‘12-inch flagship Fab 12A in Tainan, Taiwan, which has demonstrated matured technology status with consistent use to reach the economy of scale. To further expand our 28-nanometer market share into new applications UMC has announced the availability of Faraday’s 12.5G SerDes PHY on our 28 HPCU platform. The introduction of this IP highlights our ongoing efforts to introduce new features on UMC’s 28-nanometer process including a wide range of high speed transfer interface IP for optical networking and other telecommunication applications. UMC has introduced Faraday’s PowerSlash fundamental IP sales which can be incorporated into our 55-nanometer ULP Ultra-Low-Power technology to create and optimized low power operating environment for wireless applications such as those used in applications in Internet of Things. Turning our attention to the fourth quarter, we anticipate a flat outlook. We expect our Fab 12X in Xiamen China to enter production for 40 and 55-nanometer products to address the strong demand in China’s chip market. The production [ph] of Fab 12X signifies an important milestone as we enter China’s high growth IC supply channel. To realize new market opportunities, Fab 12X location in China Xiamen service as an ideal manufacturing location for customers seeking to diversify their 12-inch manufacturing needs. We look forward to successfully ramp in production of our 12-inch Xiamen Fab which will strengthen UMC’s global presence in the semiconductor industry. Fab 12X will continue to follow UMC’s core values and product goals in sustainable semiconductor manufacturing which have been implemented through our UMC’s global Fabs. Through our green manufacturing we hope to set positive industry examples, so concrete actions in order to combat global warming enhance resource conservation and save energy. UMC’s selection DOW JONES Sustainability Index Global Component for the ninth consecutive year highlights UMC’s active participation in environment protection and community service and sustainable manufacturing practices, which reflects our commitment to attain higher corporate social responsibility goals. Now please allow me sometime to summarize the recent highlights in Chinese. [Foreign Language] That concludes my comments. We’re now ready for questions. Operator please open the lines up. Thanks.

Operator

Thank you, Mr. Yen and ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And now our first question comes from Randy Abrams from Credit Suisse. Please ask your question.

Randy Abrams

I wanted to ask the first question about the guidance for the 5% growth in shipments. It looks a bit better than seasonality for most of the recent years. If you could talk about the applications and technology nodes [ph] say across 12 and 8-inch that are showing the growth and then if any area is still seeing a seasonal decline into fourth quarter.

Po Wen Yen

For our fourth quarter, by application the consumer will be flat and the communication will dip slightly and our computer will grow a few percentage point.

Randy Abrams

Okay, could you talk on 8-inch because 8-inch few months ago was slowing down if you’ve seen the 8-inch start to rebound and if any applications on the 8-inch specifically or is it still the 12-inch and 28-nanometer that’s driving the growth.

Po Wen Yen

Yes, indeed 8-inch in the past quarters is kind of weakening and either we do catch up in the fourth quarter. It’s the most our 8-inch Fab is now fully loaded in the fourth quarter.

Randy Abrams

Okay, I guess. Okay I mean if I can follow that into the 8-inch is fully loaded now. So the ASPs which were guided 5% and NT$1 [ph] could you talk, how much is currency in that for third quarter versus fourth quarter versus product mix, if it’s shift now that 8-inch is picking up more than 12-inch, is that a factor also in the ASP change?

Po Wen Yen

Yes, our first quarter ASP declined is mainly due to our surge in with summer global ASP, that impacts our gross margin.

Randy Abrams

Okay, how much factor is currency from like the?

Chitung Liu

Very minimal, fractional.

Randy Abrams

Okay and 8-inch, could you clarify is that mostly the driver IC or is there other applications that have come in to prove the 8-inch outlook.

Po Wen Yen

Yes, some of our IC business in the large panel driver.

Randy Abrams

Okay and my last question just on the Xiamen and it’s tied I think to production will start on 40 and 55, could you give us sense also on the 14-nanometer what milestone you need to see on 14-nanometer to move to 28 in Xiamen and then maybe you can give us status update on that 14-nanometer progress and reaching that milestone.

Po Wen Yen

Yes, our 14-nanometer schedule is we’re on track and in terms of our SMU [indiscernible] validation and we expect to 14-nanometer customers pick up by this quarter. We anticipate a wafer stock in the early next year 2017.

Randy Abrams

Okay and for Xiamen doing 28, if you start or I guess you get to revenue is that the milestone to apply for 28-nanometer in Xiamen.

Chitung Liu

It is more like exact approve [ph] on that as long as we deliver 14 revenue, we will be able to apply for approvals from the regulators in Taiwan and we think it shouldn’t be an obstacle.

Randy Abrams

Okay, all right. Thanks a lot for the updates.

Operator

And the next one is from Steven Pelayo from HSBC. Please ask your question.

Steven Pelayo

Just a couple of housekeeping questions. I’m curious your guidance for gross margins are in the low 20s that’s about what you reported, but I guess with 200 millimeter stronger and fully loaded, I guess that might be positive for gross margins but or I think depreciation might be negative and currency might be negative, so do you expect gross margins to directionally increase in the fourth quarter?

Chitung Liu

Gross margin rate is likely to stay flattish, however you’re correct. The key component of the formula actually moving toward the negative side along with our rising cost of Xiamen Fabs. So the main reason, we’re able to predict low 20% gross margin is mainly we’re recognizing the insurance claim from the February earthquake earlier this year, so that’s about over NT$1 billion in contribution.

Steven Pelayo

So I’m sorry what’s the gross margin guidance excluding this insurance benefit?

Chitung Liu

Including.

Steven Pelayo

And what would it be excluding?

Chitung Liu

It will be high teens.

Steven Pelayo

High teens, okay. And then the depreciation impacts, I guess I’m trying the last couple of quarters you had pretty high CapEx numbers. In fact taking your free on your cash flow statement you already reported in the first nine months US$2.2 billion, so I guess I’m a little unclear about fourth quarter CapEx number on the cash flow statement and what about fourth quarter depreciation.

Chitung Liu

As I mentioned earlier, well the numbers likely to exists our 2.2 forecast. First three quarter is close to 2.2 already but Q4 capacity will be slowing down a little bit for both Taiwan as well as Xiamen and as for the depreciation, forecast still unchanged we are looking for little over 15% year-over-year growth and sequential is kind of linear.

Steven Pelayo

Okay linear and last kind of housekeeping question from me, I guess you have Xiamen impacts to the OpEx line in the third quarter, do those increase in the fourth quarter what’s the OpEx outlook for the fourth quarter?

Chitung Liu

Well for fourth quarter from November 1, Xiamen will be starting official volume production, so every line item cost item will go to the appropriate line, so COGS will go to COGS and OpEx will go to OpEx. So in Q4, the operating expenses coming from Xiamen actually were declined by about NT$300 million and cost of goods sold were increased.

Steven Pelayo

Okay so but overall OpEx on kind of flattish revenue number should be down then quarter-on-quarter.

Chitung Liu

The total loss coming from Xiamen will be slightly increased compared to third quarter.

Steven Pelayo

But that gets put up into the cost of goods sold now not in longer in OpEx if I understand correctly, is that right?

Chitung Liu

The majority. The Xiamen Fab also has the zone operating expenses.

Steven Pelayo

Sure. Okay, thanks for helping me sort that out.

Operator

And the next question is from Gokul Hariharan from JPMorgan. Go ahead please.

Gokul Hariharan

My first question is one the commentary on different end products. So you’re talking about communication being down a little bit and compute being up quite a bit. Could we have some color about where the growth is coming in compute given compute is only like 10% to 12% of the revenue base, is that going to drive most of the shipment growth? Should we expect a meaningful increase there? And second is, on the communication side typically Q4 we do see some inventory correction, are we seeing any of that in Q4 or we’re still seeing no big [ph] connection from the communication side customer.

Po Wen Yen

In the Q4, our computer segments the LCD driver is increased and the tablets is down. And for the communication segment the AP, baseband and small panel driver interface devices is going up and the Wi-Fi, audio codec is going [technical difficulty]. And we - this is too early to guide in the first quarter 2017 however, we expect normal seasonal adjustment in the first quarter 2017.

Gokul Hariharan

Okay and in the Xiamen Fab, could we talk a little bit about now you’re guiding for about 69,000 capacity probably going up to 20,000 next year. We talk about the kind of customer base that is coming in on 40 and 55-nanometer in the Xiamen Fab, is it similar customers or same customers in Xiamen as well compared to Taiwan or are they completely new set of customers? And any color in terms of the verticals, is communication or heavy or consumer heavy?

Po Wen Yen

Yes, we’re leveraging our Xiamen Fab with our most competitive 40-nanometer technology to capture the fast growing China market. As we just mentioned initial production in Xiamen Fab will be mainly in communication and consumer segment. So the first wave of our communication will focus on the AP and baseband and Wi-Fi, audio codec and there are some second wave set up RF and IP channel is coming on the way.

Gokul Hariharan

Okay and could you characterize like when you get to reasonable ramp up in Xiamen, would it be mostly Chinese customers, Chinese domicile fabless customers or is it still going to be mix of Chinese and International?

Po Wen Yen

Mix in Chinese customer and International.

Gokul Hariharan

Okay, great. Thank you.

Operator

And the next question is from Michael Chou from Deutsche Bank. Please ask your question.

Michael Chou

My first question is, what will be your 28-nanometer sales portion quarter-by-quarter next year given that TSMC commented that their shipping is still very dominant in 28-nanometer next year, so what is your view for your market share in 20-nanometer, also follow-up question.

Po Wen Yen

Our 28-nanometer, we’re still trying to increase 28-nanometer capacity and shipments for the 2017, we don’t have specific number, quarter-over-quarter numbers right now.

Chitung Liu

Yes, but we can answer you from a capacity point of view that we are adding few thousand more 28-nanometer capacity in China and Taiwan and once we have our 14 revenue, we will also get approval from Taiwan Government and our Xiamen Fab therefore we’ll build at least 10,000 wafer for 2017 as well.

Michael Chou

You mean therefore Xiamen Fab, right?

Chitung Liu

Yes.

Michael Chou

So that means you ate up more than 10K in total for 28-nanometer in 2017, am I right?

Chitung Liu

Yes, very likely. 5K addition is ongoing right now.

Michael Chou

5K addition?

Chitung Liu

Yes.

Michael Chou

Okay. The other question is when would you reach the comparative gross margins for 28-nanometer?

Chitung Liu

I’m sorry Michael you have to speak up, we cannot - we barely hear you.

Michael Chou

Okay. Sorry. When would you reach the comparative gross margin for 28-nanometer?

Po Wen Yen

For our 28-nanometer gross margin, is even though it’s improving but stay relatively stable and there’s still few percentage point to the 12-inch average gross margin.

Michael Chou

Okay, so given strong competition from TSMC so, is that fair to say it could be quite challenging for you to reach the comparative gross margin or 12-inch average gross margin within four quarters.

Po Wen Yen

We can only say that the gap is narrowing and the few percentage point to the 12-inch average gross margin.

Michael Chou

Sure. Okay. The other question is housekeeping question, what is your assumption for Q4 currency? And what’s your currency in Q3? Thank you.

Chitung Liu

Basically it’s flat to third quarter not much change.

Michael Chou

Okay and sorry, what is the number for your Q3 currency?

Chitung Liu

31.5.

Michael Chou

Thank you so much and back to the queue now. Thank you.

Operator

And the next one is from Tony Chan from Morgan Stanley. Please ask your question.

Charlie Chan

Hi, it’s Charlie. So most of my question were answered but if I can get more detail on 20-nanometer so what is the High-K/Metal Gate mix of 28-nanometer today and what’s the margin profile difference to the poly-SiON? Thanks.

Po Wen Yen

You’re asking the capacity or shipment?

Charlie Chan

Both if you can provide.

Po Wen Yen

Yes, the capacity mix by the end of this year we’re going to have a near 30K wafer per month for 28-nanometer around 70% of the 30K’s is High-K/Metal Gate version and around 30% is poly-SiON version.

Charlie Chan

How about the shipment and also the gross margin difference?

Po Wen Yen

I would say the shipments in Q3 is around 63% of poly-SiON version and around 37% is High-K/Metal Gate version.

Charlie Chan

Okay, yes and margin please?

Chitung Liu

Margin is like highly depended on the respective loadings and but we only have the blended number which is few percentage below our 12-inch comparative [ph] average.

Charlie Chan

And also I know you’re still doing the margin [ph] for next year depreciation of CapEx do have a range, even it’s a big range for our modeling.

Chitung Liu

We will report the CapEx number next quarterly conference call and as for depreciation, it will link to the CapEx number, but for sure we will see quite a significant jump from our Xiamen joint ventures and Taiwan will be somewhat flattish and we will provide more detail numbers next quarter.

Charlie Chan

Okay and lastly I think some carriers have seen some comments about equivalent vendors that there are some delayed or governments subsidy in those China projects, can company provide some color or dispute of the rumors?

Chitung Liu

No, we already deny and post on the Taiwan Stock Exchange Bulletin Board that there’s no such things, this is pure speculation by the media.

Charlie Chan

Okay and how about your memory project with [indiscernible] in terms of R&D progress and when are you going to tap out the first chip?

Chitung Liu

The R&D project is ongoing splendid there is no change in schedule. And I think the tap out is sometimes end of next year.

Charlie Chan

Okay, great. Thank you very much.

Operator

Next we will take Sebastian Hou from CASA. Please ask your question.

Sebastian Hou

So my first question is I wanted to clarify on the guidance for fourth quarter on ASP, which is going to be down 5%. Sorry I wasn’t able to create two list, to hear that correctly, so is it mainly due to the product mix because of the more 8-inch, the less 12-inch on the percentage perspective, am I right?

Po Wen Yen

Yes, basically yes.

Sebastian Hou

Okay, so do you see any pricing pressure? I mean from the apples-to-apples perspective.

Po Wen Yen

In some area yes but - we have a pretty good technology portfolio. So yes.

Sebastian Hou

Okay, understand. So my second question the value got your third quarter records, on your communication application which is up 3%, so mostly flat this way. But your 28 nano’s and up a lot and 40-nanometer it’s continue to go up in 3Q and so presumably I thought like in the most of your 28 and 40 is due in communication, so I just wonder what’s the mismatch here and what have I missed here, in that range yes?

Po Wen Yen

In communication segment the Wi-Fi and audio codec is going down, is driving the first quarter, so that the few percentage points drop in communication in first quarter. So the AP baseband is pretty strong, still very strong.

Sebastian Hou

Okay, thank you. And can I get the numbers when your utilization rate in 12-inch and 8-inch respectively in 3Q and first quarter, if I may?

Po Wen Yen

Yes, the first quarter the 8-inch is around, yes it’s fully loaded and for 12-inch it’s around mid 80% range.

Sebastian Hou

Okay and what was the number in the quarter?

Po Wen Yen

In the third quarter the 8-inch is around 90% is range and 12-inch is at the high 80% range.

Sebastian Hou

Okay, thank you. And my next question is regarding your 40-nanometer because I feel you mentioned that you have the 40 nanometers wafer start in the first quarter next year, so can I get more details on what kind of customers in what type of applications and in terms of the revenue contribution, do you have any expectation for the full year, next year and what type, in terms of what capacity ramps you expect?

Po Wen Yen

Yes, I cannot comment for the moment for this first pioneer [ph] customer. But we do engage several potential customer on the way and we just mentioned we’re going to have first customer tap out by this quarter for to wafer start we expect to recognize on 14-nanometer revenue contribution in the first half of 2017.

Sebastian Hou

Okay, but do you expect that will, I mean 40-nanometer contribution presumably in second quarter 2017, do you expect that will contribute up to 1% or 2% of the total revenue?

Po Wen Yen

It’s too early to comment on that.

Sebastian Hou

Okay and little more details on your 40-nanometer. I’m curious about what the yield rate progress you have right now, is it already reaching the same size [ph] label for you to begin mass production.

Po Wen Yen

Yes, the yield rate is continually improving and get our customers approval for new product tap outright now and also their test chips their validation, their performance is way on track.

Sebastian Hou

Okay, thank you and my last question is, if I may is, your Xiamen Fab you mentioned earlier about you want to do - initially mostly do 40 nanometers and 55 nanometers, but if I look at your revenue breakdown by technology node, your above 40 and below 65-nanometer this range, the revenue has been declined for the past few quarters from a young year [ph] perspective. So I just wondered it is more about 40-nanometer or there is still any customer demand for you on 55 nanometers.

Po Wen Yen

In initial stages, we’ll focus on 40-nanometer and still there are some potential customer, we’re targeting on 55-nanometer. We’re actively engaged those potential customer on 55-nanometer to improve our utilization rates in this node.

Sebastian Hou

Okay, but still I think based on your visibility it seems like 40-nanometer has a better visibility for contribution rate.

Po Wen Yen

Yes, correct.

Sebastian Hou

Okay, thank you. That’s all I had.

Operator

And the next one is from Roland Shu from Citigroup. Please ask your question.

Roland Shu

First question is a follow-up for your 40-nanometer. So Chitung you said you have to have 40-nanometer revenue in order to apply for the meet production for 28-nanometer in China. So question is, how much revenue you have to generate for 40-nanometer before you’re able to apply for the application to meet production of 28-nanometer.

Chitung Liu

There is no black and white rules on that as long as we start production with revenue recognition we should be able to apply and it’s up to the regulators to decide when they will grant next approval. Of course it is our plan that we will do it as soon as we can.

Roland Shu

Okay, does parallel revenue from parallel production count.

Chitung Liu

I really don’t know and I kind of don’t want to touch this gray area. So again it’s to our benefit that we will apply as soon as we can.

Roland Shu

Okay, so you said from first half next year you’re going to start recognize the 40-nanometer revenue so that means at that time, you’re able to apply for the application. Right?

Chitung Liu

Yes.

Roland Shu

Okay, thank you. And second question is for the depreciation. The last time you said this year the whole year depreciation will be increased by around 20% year-on-year and just earlier you said, now is changed to above 15%, so just want to clarify how much depreciation to increase this year?

Chitung Liu

It will be closer to 15%. Previously we talked about 15% to 20% and now it’s more closer to 15% due to the later recognition of the Xiamen depreciation.

Roland Shu

Okay, yes. Okay, thank you. So with the amount close to 15%, this is.

Chitung Liu

Yes, 15.

Roland Shu

Okay and for your 5% “wafer shipment” increased in 4Q how many does it come in from Xiamen Fab.

Chitung Liu

Xiamen has very minimum contribution in Q4 so virtually the delta is coming from the increased 8-inch loadings.

Roland Shu

Okay, yes. Okay so it’s mainly from 8-inch loading and also last quarter you expect up to recover 8-inch wafer revenue from first half next year and I think you do recover from 4Q, so this is much earlier than what you expected. So what’s your target for this 8-inch wafer revenue recovery, wanted to go back to 2015 level or go back the picked level maybe in 2010 or it will be just go back this full [indiscernible] level.

Chitung Liu

Well this is very difficult to predict. I think for 4Q our 8-inch wafer loading improvement is partially based upon the trade-off of pricing but going to Q1 you will be more dominant by the seasonal pattern of course our effort to continue to diversify our client base for 8-inch. So it’s, I’m saying it’s too early to predict plus the Q1 8-inch loadings look like.

Roland Shu

Okay, understood. Okay, thank you.

Operator

And next one is from [indiscernible] from Taiwan Securities. Please ask your question.

Unidentified Analyst

I just wanted too [ph] easy to clarify, I think Chitung mentioned about the insurance claim that is going to contribute to Q4 gross margins. I wonder if you also include some of the insurance claim for Q3, so that’s why your gross margin for Q3 was a bit higher than your original guidance.

Chitung Liu

Q3, yes we did have some very small amount of insurance claim but it’s kind of largely offset by the impairment loss from our solar subsidiaries so the impact is quite minimum in third quarter.

Unidentified Analyst

Okay so the majority of the insurance claim should be contributed into your Q4 margin guidance, am I right?

Chitung Liu

Yes.

Unidentified Analyst

Okay, yes. That’s all I had. Thank you so much.

Operator

And the next one is from Steven Pelayo from HSBC. Please ask your question.

Steven Pelayo

Yes, I’m sorry if you guys answered this specifically. In your presentation you talked about Asia revenues I think being 45% of the total. Maybe you could talk a little bit about specifically what percentage of revenues are they - this year and what do you think they’re going to be may be next year. We’ve got companies like SMIC who I think is growing more than 20% for their Chinese revenue, so can you talk a little bit about China and specifically and what it means for UMC, this year next.

Chitung Liu

The China revenue contribution this year is around 5% to 10%.

Steven Pelayo

And what do you think a year from today, do you think that this can double, I have no idea.

Chitung Liu

They will be increased but we don’t have still too early to comment on that.

Steven Pelayo

Okay, 5% to 10% today though. All right and then my next question was, you didn’t want to comment on depreciation and the impact next year yet, but you said it would step up with the Xiamen Fab. So I guess I’m trying to figure out that it’s in the fourth quarter excluding insurance settlement you have a high-teens gross margin. If in the first quarter next year you have a seasonal revenue decline plus this depreciation uptick. I guess what are we talking about, do the headwinds to gross margin and the first quarter in next year then. Could they be below 15%? If I just threw out a number I mean.

Po Wen Yen

Yes, we do not have a full visibility on the first quarter 2017 for the moment. Though it is, expected some impact we continue into the first quarter 2017 however we’re working very hard on improving our ASP and through our product mix optimization and many cost reduction activities.

Steven Pelayo

Well maybe I could ask the question the other way from a financial side just the depreciation impact, you didn’t want to talk about it for the full year 2017 but what about just in the first quarter. Do you think quarterly depreciation increases by I don’t know 5%, 10% quarter-on-quarter or more?

Chitung Liu

Well we really don’t have the number, it’s not like we don’t want to talk about it and the CapEx number hasn’t really been firm up for 2017 and the [indiscernible] of the CapEx also has impact under the depreciation, what I can say is Xiamen will see a significant jump because of the volume production and Taiwan part, the Tainan side will stay blackish.

Steven Pelayo

Okay, great thank you.

Operator

And the next question is from Charlie Chan from Morgan Stanley. Please ask your question.

Charlie Chan

I’d like to clarify my previous question on High-K/Metal Gate versus poly-SiON mix question. So first of all was your 20-nanometer capacity already 30,000 wafer per month in 3Q?

Po Wen Yen

In the end of this year.

Charlie Chan

Okay, because it seems to me your mix changed a lot so I want to make sure whether into the first quarter you’re converting poly-SiON into High-K/Metal Gate or you maintain the same poly-SiON capacity just additional capacity all goes to High-K/Metal Gate, that’s my question.

Po Wen Yen

The additional 28-nanometer capacities will go to the High-K/Metal Gate.

Charlie Chan

I see so how many wafer per month it would be for High-K/Metal Gate, the additional capacity.

Po Wen Yen

In the first quarter?

Charlie Chan

Yes.

Po Wen Yen

Is only a slightly increase from the first quarter on High-K/Metal Gate version.

Charlie Chan

Okay, yes so. It sounds to me that your transition rate for High-K/Metal Gate could be very low in third quarter, you said right impression.

Chitung Liu

Yes, I think the traditional High-K/Metal Gate is lower than poly-SiON. Poly-SiON is actually over 100% today and still look very tight in the following quarter. However we do have flexibilities in between High-K/Metal Gate versus poly-SiON so some of the capacity can support each other and vice versa and that’s the picturization [ph] for High-K as well as poly-SiON.

Charlie Chan

Okay, so putting into perspective since you’re adding more High-K/Metal Gate capacity into fourth quarter, so what is changing meaning, do you really see High-K/Metal Gates customers will demand significant ramp into first quarter?

Po Wen Yen

That is our plan in the beginning of this year. So we’re still targeting the more - according to our customer engagement still looking really promising on the High-K/Metal Gate versions utilization in the coming quarters, not in the short-term quarter but in the coming quarter improving High-K/Metal Gate versions.

Steven Pelayo

Okay, I see. Yes, so lastly you also mentioned that there could be some ASP trade-off for 28-nanometer in fourth quarter, did I interpreted right? Meaning are you lower sort of wafer price to boost up the shipments.

Po Wen Yen

We extend [ph] that is mainly because our 8-inch are fully loaded and with some - yes, because at the ASP is slower.

Steven Pelayo

Okay, so it’s [indiscernible] okay I got it, thank you.

Operator

Ladies and gentlemen, we’re running out of time. So we’re taking the last question and the last one is from Sebastian Hou from CASA. Please ask your question.

Sebastian Hou

Just one follow-up. Chitung earlier your answer another analysts question and you mentioned about the first quarter you see better 8-inch utilization rate is due to pricing. I’m not sure if I hear it correctly. So I wonder is it because you lower the price, so you gain share in the first quarter so that’s why you can’t have 100% marginal rate.

Chitung Liu

Partially yes.

Sebastian Hou

Okay, so you’re gaining share 4Q from the other Taiwanese Foundry or Chinese Foundry.

Chitung Liu

We certainly have full loading in Q4 at the expense of some low pricing for certain special orders.

Sebastian Hou

Okay and you expect because again so you see that being first quarter next year will come back to the normal seasonality.

Chitung Liu

Yes, that’s our plan. Yes.

Sebastian Hou

Okay, thank you.

Operator

Thank you for all your questions. That concludes today’s Q&A session. I’ll turn things over to UMC, Head of Investor Relations for closing remarks.

Bowen Huang

Thank you everyone for joining us 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 ladies and gentlemen that concludes our conference for third quarter 2016. 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 Investor Relations, Investors, Events, Section. You may now disconnect. Good bye.