UMC 联华电子

Operator

Welcome, everyone, to UMC's 2022 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation there would be a question-and-answer session. Please follow the instructions given at the time if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within two hours 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. Mr. Lin, please begin.

Michael Lin

Thank you, and welcome to the UMC's conference call for the first quarter of 2022. I am joined by Mr. Jason Wang, the President of UMC, and Mr. Qi Dong Liu, the CFO of UMC. In a moment, we will hear our CFO present the first quarter financial results, followed by our President's key message to address UMC's focus and second quarter 2022 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/Financials 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 a more detailed discussion of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast like through the internet. Now, I would like to introduce UMC’s CFO, Mr. Qi Dong Liu to discuss UMC’s first quarter 2022 financial results.

Qi Dong Liu

Thank you, Michael. I would like to go through the Q1 ‘22 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4 the first quarter of 2022 consolidated revenue was NT$63.42 billion, with the gross margin at 43.4%. The net income attributable to the stockholder of the parent was NT$19.81 billion and the earnings per ordinary share were NT$1.61. In terms of capacity utilization rates, they remain at 100%. And for the wafer shipment is 2.5 million inch equivalent in Q1 of 2022. Our income statement, on a quarterly sequential comparison basis, revenue went up by 7.3%, mainly driven by a better ASP and gross margin rate is 43.4% compared to 39.1% in the previous quarter, and operating income as a result has reached 35.2% for operating income margin, or a number of NT$22.3 billion. The net income is about NT$20 billion, compared to NT$15 billion in the previous quarter, which is about 25% quarter-over-quarter growth and the EPS is NT$1.61 a share. In terms of year-over-year comparison, revenue grew up by 35% year-over-year and operating margins grew nearly two times to NT$22.3 billion and EPS also almost doubled compared to the same period of last year. In terms of our balance sheet revenue, cash remained strong at NT$172 billion and the total equity is about NT$300 billion. As I mentioned the Q1 catalyst, one of that is the stronger or better ASP, which continue on the rise. In terms of revenue breakdown, we see a little change on a sequential basis and U.S. represent 22% of our total revenue and Asia is 54%. IDM and fabless ratio did not change much. Currently IDM is about 13% of our revenue and fabless is the remaining 87%. In terms of segment breakdown, communication still remain our largest segment of 45% revenue and the others which including auto and industrial is about 12%, and computer and consumer are 17% and 26% respectively. And revenue from different geometry, the 14 nanometer and below revenue remained steady around 38%, almost identical to the previous quarter. And we continue to see some more capacity increase for quarter two of 2022. We are seeing 10,000 wafers per month additional capacity, mainly in 20 nanometers coming from our factory operations. So that will lead to about 4% to 5% of capacity increase in the second quarter of 2022. After our announcement for the Singapore P3 expansion, our revenue, our CapEx budget has now increased to $3.6 billion for 2022, a majority of which, 90% of that is 12 inch related. The above is the summary of UMC’s results for Q1 2022. 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 Wang

Well, thank you, Qi Dong. Good evening, everyone. Here I would like to share UMCs first quarter highlights. We started 2022 with a solid first quarter. The strong wafer demand kept our fab operating at full capacity and higher average blended pricing lift our overall revenue. While we have observed general end market tapering of cyclical demands associated with COVID-19 pandemic, UMC’s business continued to be well supported by structural trends and increasing silicon content in devices and driving new applications. Specialty technologies such as a non-volatile memory, power management, RFSOI and OLED display driver are necessary for applications across 5G, AIoT and automotive mega-trends. And our strategy to focus on leading specialty technologies has been successful, which now contribute more than half of our wafer revenue. An increased number of customers are recognizing the value of our customized specialty process and forming long-term partnerships with UMC. Looking ahead, we expect the positive demand outlook will remain unchanged despite some market volatility caused by the pandemic and geopolitical issues. The expansion at our Fab 12A P5 is coming online in the current quarter, which will help us meet excess 28 nanometer demand that we haven’t been able to fulfill. We are also actively adding capacity at our overseas bases to support our customers’ long-term growth. For our Singapore site, we recently announced a new fab to address growing 22/28 nanometer demand, has already secured multi-year supply agreements from 2024. Meanwhile our Japan subsidiary, USJC and DENSO have agreed to collaborate on the production of power semiconductors at USJC’s 300 millimeter fab in order to serve the growing demand in the automotive market. The collaboration demonstrates our strong commitment to supporting our customers amid constraints in the automotive value chain. As part of the industry mega-trends, the accelerating adoption of electric vehicles will serve as a growth catalyst for our automotive business. We are excited to be selected as the foundry partner for many global leading customers as we aim to expand our market share in the fast-growing automotive segment Next, I will also like to take a few minutes to share our view on the industries outlook and where we see you UMCs position in the industry going forward. I would like to take this opportunity to reiterate that UMCs growth strategy is aligned with industry’s mega trends. As a leading specialty technology provider, our customized and highly differentiated solutions across 8 inch and 12 inch will minimize UMC’s exposure to market seasonal fluctuations. The specialty technology will enhance customer stickiness in following our long term business visibility. In addition, the LTAs demonstrate our customers’ long term commitment and endorsements in cooperating with UMC, giving us the confidence to expand our capacity and grow cohesively with our customers and remain resilient during the industry downturn. As for 28 nanometers, we always aligned with the customer on 22/28 nanometer new capacity expansion. With the P6 ramp in 2023, the demand supply balance will depends on the design of the tool and equipment delivery. In light of this recent equipment delay, supply chain disruption, the impact on allowing 28 nanometer capacity coming on stream still remains to be seen. We believe 22/28 nanometer will be a long lasting node driven by applications such as Wi-Fi 6, 6E, networking and OLED driver IC. We are well-positioned with diversified product portfolio to capture these market opportunities. Now let's move on to the second quarter 2022 guidance. Our wafer shipment will increase by 4% to 5%. ASP in U.S. dollar will increase by 3% to 4%. Gross profit margin will be approximately 45%. Capacity utilization rate will be at 100%. Our 2022 cash based CapEx will be budgeted at the $3.6 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Operator

Yes, thank you President Wang. Ladies and gentlemen, we will now begin our question-and-answer session [Operator Instructions]. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Randy Abrams

Yes. Thank you. And yeah, I wanted to ask the first question just about the environment. Wanted to see first from the China COVID lockdowns, if you've seen any market impact on orders, either from the factory shutdowns or consumption impact? And I'm curious within your application mix if you've seen cancellation or slowing in certain applications, and then shift other applications. And if you're still in a position of unfulfilled demand or you see some application still with demand you need to get capacity to meet.

Jason Wang

Okay, well I mean the China lockdown certainly had some effect to the market demand. But the overall the strong demand for auto, industrial server and networking segment have offset the softness in Smartphone and mobile and the PC to a sound market risks under the China lockdown. For the overall 2022 it still remains a challenge for us to meet the aggregate demand from our customers. So near term whether it is the demand or inventory fluctuation among the selected customer has not impact the UMC demand supply imbalance situation.

Jason Wang

Okay, I want to catch up on that CapEx increase. It sounds like tied to Singapore. But that's a few years out. Are you having to prepay to secure tools quite early? And given the bottlenecks if you could give an update on timing of when you're bringing up some of the capacity, like the additional phase and timeline next year, if that's still ramping up and how much is ramping up middle of next year? Well, first for this year, the P5 is coming on this quarter. As we mentioned earlier, for the next phase is our timeline P6 ramp. Given the challenges in the supply chain, including component labor shortage, we have encountered an industry wide equipment delivery delays. We are currently working diligently with the supplier to identify some of the critical tools and to shuffle the priority and minimize the delay. Furthermore, we actually will shorten internally our two installation and qualification schedule. So the bottom line is, the goal is through those efforts, we will ensure our LTA commitment to the P6 customer in 2023 remains unchanged.

Randy Abrams

Okay, and if I could just clarify again for the CapEx raise, what was the factor already to have that increase for the new fab? And you mentioned securing LPA? Does that imply you still expect, even with delay, that some of that capacity should ramp the second half next year?

Jason Wang

Well, I mean, we are managing the P6 ramp, but we will experience things down the line. We are also aligning that with our base capacity to ensure the customers commitment are met. So there are some dynamic, but we have to continue working that with both supplier and the customer.

Qi Dong Liu

And increasing our CapEx budget, cash based CapEx for 2022, it's mainly for the shell construction for P3 in Singapore.

Randy Abrams

Okay. For the overall CapEx framework is there a rough way to think about next year and the depreciation where you've had a nice tailwind based on the new cash payment schedule. How do you see depreciation this year roughly for next year?

Qi Dong Liu

This year, we mentioned the overall depreciation expenses should be down by less than 5% year-over-year similar to that of last year. However, the next year depreciation expense is likely to arise in more meaningful ways. We will discuss the numbers later this year. The overall both P3 and P6 are increasing our -- not only absolute profit, but also the EBITDA margins. So there'll be some short term accounting depreciation impact in 2023. But it will quickly go back to a normal range.

Randy Abrams

Okay. And one final question, the LTA I think last quarter, you mentioned NT$18 billion for the baseline capacity. Just wanted to inquire a little more. You mentioned in the prepared remarks downturn resilience. If there were a stark correction to how much flexibility, like if you give it on shipments for them to push out, if they don't have the demand. And then how fixed is the pricing in the downturn, like have you have you kind of secured for baseline fixed pricing, or if you can clarify a little more on the way to think about the LPA in a downturn scenario?

Jason Wang

Sure. Well, I mean, in general, the back on the LTA is to serve the long term compounding benefits of both customer and UMC. So while we’re both partly focus on the pocket of market to pursue business growth, UMC along with our customers share the contractual obligations set forth in the agreement. Given those obligations, both parties have conceded the scenarios and factor in all the financial risks outlined in LTS along with the market fluctuation. So the conditions set forth on both party in the LTA will not deviate regardless of market dynamics.

Randy Abrams

Okay, won't be deviated and it sounds like you do expect quantity and pricing then. There's some commitments on those in those obligation?

Jason Wang

Absolutely. There is a commitment on both volume and pricing. Yes.

Randy Abrams

Great. Okay. Thank you. That's my questions.

Jason Wang

Thank you.

Operator

Thank you. And next we'll have Brett Simpson of Arete Research for questions. Go ahead, please.

Brett Simpson

Yeah, thanks very much. I wanted to just follow up on Randy's question there about LTAs. I think you mentioned 18 billion last quarter. Did UMC sign any new LTAs this quarter? And if so, where's the cumulative LTM among today? And what's the prospect for signing new LTA throughout this year as the vast majority of these fields sort of in the rearview mirror now? Thank you.

Jason Wang

LTA is a mechanism to give us the longer term visibility and the so yes, the LTA is a mechanism that will continue employ throughout this year. And in fact, we -- actually there is a modified LTA still under discussion currently. We do see this LTA serve, I mentioned is a long term goal, compelling benefits for both customer and ourselves. So we'll continue to deploy that, yeah.

Brett Simpson

And did LTAs rise in the quarter, 18%, they go up?

Jason Wang

They have gone up a little bit, and they still are growing on, and we expect that number will continue going up. And in fact the DENSO announcement we just did, is actually is part of the LTA as well.

Brett Simpson

Okay, that's helpful. And maybe just as a second question, I guess we've seen a sharp increase in your gross margins over the last couple of years. And I understand LTAs give you protection around the cycle around market -- changes in market conditions. Can you share with us your thinking about how gross margins trend through the cycle for UMC? If we looked at the sort of puts and takes of the cycle, where would you expect gross margins to sort of settle in long term for UMC given all the dynamics we've seen of late?

Jason Wang

I really -- maybe Qi Dong can comment that. But if I can give you a bit of a background on this. The way we look at this gross margin, in the long term is the way that was throughout this past few years. We have transformed the company, resilient, and it's well-positioned to weather through the market fluctuation. So a few things. One is the CapEx strategy. We're a stringent ROI driven-criteria and backed up with the customers LTA commitment. The second is we have continued to close cooperate with a global leading customer with to have optimized our client portfolio. And third, is we continue to grow our specialty technology business with the content, higher differentiation, chelation and customize the process solution, which will provide a longer visibility and stickiness. Therefore, the company will have more room to grow EBITDA margin, their product mix refinements. And the last is the company's healthier financial now, the structure, that includes a much improved the breakeven point. All this I think will contribute to allow UMC to whether through the semiconductor totality so that means the margin will stay at a healthy level. And that's it on a higher level how we manage this margin going forward. Yeah.

Brett Simpson

Thank you very much.

Jason Wang

Yes.

Operator

Thank you. Next question is from Bruce of Goldman Sachs. Go ahead please.

Bruce Lu

Thank you for taking my question. One question. I want to ask actually moving in to the second quarter, I mean the gross margin, is guiding for 45%, which is up from like 40% last year comparing the guidance to guidance. And even [indiscernible] it’s true we should see a major, a massive margin improvement, but the only differences between second quarter and the first quarter is P5, which is mostly probably in this. Can we assume that your 28 nanometers profitability is already higher than the corporate average?

Jason Wang

No, I think 28 nanometer margin is in line with 12 inch operation. And that from a continuous payment point of view of our EBITDA margin 28 may have the best EBITDA margin internally. And I have to emphasize that Q1 guidance of 40% is somewhere lifted by this started with NT. For quarter two, we already are seeing this weaker NT scenario. And there are certain headwinds in quarter two as well mainly coming from a rising material costs and the increased labor costs which pretty much even out by this better ASP factor in the second quarter. So 45% roughly, cost margin is the best estimate we can see for now for the second quarter.

Bruce Lu

Thank you. I think the next question is that you know, the investor concern is mostly NT deterioration. Can you provide us that, how much of your business right now is pretty much like single source pay by order or like customized project? What is the revenue contribution from those up, which is more difficult to move away, even when you see that downside?

Jason Wang

All right. So, let me put it this way. For our overall product mix the specialty technology consider a single source and customized product that probably representing more than 50% our current revenue now. And that is continue to increase. In the current quarter was about over 50%. And from the LTA arrangements for the 28 nanometer particularly the coverage is about 80%, okay. And in addition to those, from the announcement of new technology, as a single source that also has a good percentage of that in there. So net-net I will say we have about 65% will consider as a single source and specialty technology. So that will probably give you some ideas. And in addition to that, we also have some overlap with the LTA coverage.

Bruce Lu

Do you have the prices for two years?

Jason Wang

I think that number will continue to increase. Our specialty technology and customer engagement momentum remain strong and robust. I think the number will continue to rise. And while we continue that progress, and we can update on ongoing basis.

Bruce Lu

I think I want to squeeze one question for the R&D expenses, which is below 5%. You know, 5% of the revenue in first quarter already? Is that a new norm for the UMC? I think we discussed this like two three years ago, but now it's getting to the level of 5%. Is that the new norm for UMC moving forward?

Jason Wang

Given the current near term projection, we will stay in a similar level while our revenue continue to grow. And meanwhile, we continue developing in a different technology in a specialty area. But I think we’re still within that ballpark.

Bruce Lu

I see. Thank you. I will go back to the queue.

Operator

Thank you. Next one Charlie Chan, Morgan Stanley. Go ahead, please.

Charlie Chan

Thank you. Hi, Jason. Hi, Qi Dong. Good afternoon. So my first question is about your LTA or contract with customer, because right now you see this consumer or PC, smartphone customer, their inventory keep going higher. Would you allow customers to trim or cut this forecast even they have some contract with you?

Jason Wang

Well, I mean, the customer forecast changes, but the contractual obligations that we sort of touched on earlier, that condition of that was in the LTA will not deviate, regardless of market dynamics.

Charlie Chan

Yeah, so there's my counter, because you want the customer to give their obligation and their inventory keeps going higher. But the problem is that those events we cannot really sell through to the end market given the market situation.

Jason Wang

That's not entirely correct. So if a customer's taking a position to reduce the loading, as long as they fulfill their contractual financial obligation, that is another alternative.

Charlie Chan

Yeah, but if there is any kind of would that force customer to keep on producing?

Jason Wang

Well, there's certainly some contractual obligation financially. So and I -- it's our belief, most parties have considered the scenario while we enter into that agreement.

Charlie Chan

Okay. Okay. Thanks and also I kind of agree that some sub segments are still pretty robust, like automotive, networking, cloud, as you mentioned. But I think UMC is a real exposure to those so called VCN [ph] segments is quite low, I don't think that in aggregate exceed that 20% of revenue. Would you agree with that?

Jason Wang

I didn't catch the last statement again, I'm sorry.

Charlie Chan

So those exposure to automotive networking, cloud together, your revenue exposure shouldn't be more than 20% in my understanding, is that right?

Jason Wang

No, it's actually higher than 20%.

Charlie Chan

Okay, so how high it would be?

Jason Wang

I mean, this -- well, we -- I will say we will probably one-third of that is already with Zigna Automotive, industrial. And there's -- the other area, even within the PC networking, the way that we category that, the part of that is attributed to networking, which has a much stronger demand. So because if we go into subcategory, including PC notebook, and then you have to segregate by different applications again. And so they are from the stronger segments, and the subcategory of this is from the weaker one. So the exposure wasn't exactly on a very higher service level.

Charlie Chan

Okay, so yeah. So this is very, very helpful, I think, all those try to get a sense. First of all your current fab you have a patient [ph] or next quarter vision, whether it really reflects the consumer tech inventory correction, and whether UMC has sufficient backlog from industrial automotive and networking to offset that weakness. And I think those are very, very helpful. But lastly…

Jason Wang

So maybe I can give you another example. For instance, on the smartphone space, we’re more exposed to the 5G phone, in the OLED space on the high voltage versus the TTDI [ph] because we don't do much of a TDDI in the smartphone area. But we do quite a bit of automotive in a TTDI display.

Charlie Chan

I see this is all very helpful.

Jason Wang

Even with the high voltage, there's a mix of applications that was in there. So the mix is quite different.

Charlie Chan

Is there any concern that given you the LTAs like two way, right. You have to deliver customers need to stick with the order. For P6, right? If there's any kind of scheduled delay, would you need to pay a penalty to your customer?

Jason Wang

Again, there is a mutual contractual obligation. Right. And so we both calculated that, and we have considered all the scenario and factored into that. So at this point, our -- from UMC’s perspective, our goal is to ensure our commitment to be meet.

Charlie Chan

I see, I see. So, you want to put the customer's demand as their first priority, right and -- okay, I get that. And what's is the biggest shortage I mean, the bottleneck for entire production line.

Jason Wang

Well, that's quite a bit of details. There are many -- long distance -- it’s hard to go into these.

Charlie Chan

Okay. Okay. Understood. Good luck. Thank you.

Jason Wang

Thanks.

Charlie Chan

Thanks, Jason. Thank you. Bye.

Operator

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

Gokul Hariharan

Hi, good afternoon, and thanks for taking the question. First of all on LTA, Jason or Qi Dong, could you remind us how much of your 12 inch capacity and 8 inch capacity is now covered by LTA? I guess, Phase 8, and phase 6, P5 and P6 will probably be 100% covered but for the existing capacity could we have a reminder on how much is covered by LPA?

Jason Wang

Now we don't break down by traffic, but obviously all the newly built capacity, or the new capacity come on stream, as we mentioned, P6 in China and P3 in Singapore, are all covered by multi-years LTA. So all the new capacity, 100% and the new DENSO part is covered by LTA. And I think the ratio I think as I've just mentioned, the overall business covered by LTA is close to 30% 40%.

Gokul Hariharan

Understood. So, let me ask I think you mentioned that you saw some demand weakness in some of the cyclical areas related to pandemic, shutdown or lockdown etc. Could you talk a little bit about what are the customer conversations you're having in these areas. Is your backlog reducing as a result? Is there still a lot of non-supported demand for these segments that you still can't fulfill, is that not supported demand coming down. Just wanted to understand what are the dynamics that are happening between you and the customers given some of this end demand weakness?

Jason Wang

In general we remain challenged for us to meet the aggregate demands of our customer. So we still severely under supply to our customer. But mainly if you break it down by different segments, the PC notebook and the smartphone area has shown some softness while the automotive and industrial server networking still escalating with the shortage. So I think at this point our filled demand remains at fairly high level to us, okay for us. And the conversation with some the customer is we are diligently mitigate or modulating from the soft area, given the higher inventory or the solid demand if we can modulate those capacities support those on the severe shortage. So that is ongoing process effort.

Gokul Hariharan

Okay, understood. The second the last question is on your 2Q wafer price increase. I think you talked about roughly 3% to 4% increase in wafer ASP on your store basis. Is that primarily coming from your increased 20 nanometer mix or are you still seeing wafer price increases to customers given the unfulfilled demand?

Jason Wang

It has both, is a result of a both pricing increase as well as the better product mix.

Gokul Hariharan

Okay, okay, thank you very much. One last question is this DENSO JV on IGBT. Congratulations on that. Could you talk a little bit about what kind of capacity of UMC Japan, would you be allocating for that? Is there any details in terms of the plans for this?

Jason Wang

Sure. Under the program, UMC, we, through USJC will provide 12 inch IGBT manufacturing service to DENSO. The program is one that DENSO will bear the CapEx for the tools, and USJC will bears the CapEx for cleanroom and facilities. And the production rent for DENSO was started in 2023. And a target capacity rental will reach 10k per month by 2025.

Gokul Hariharan

Understood. Okay, thank you very much. Thanks.

Jason Wang

Sure. Thank you.

Operator

Thank you. Next question Sunny Lin of UBS. Go ahead, please.

Sunny Lin

Hi, Jason, Qi Dong. Thank you for taking my questions. Congrats on the steady performance? My first question is also to follow up on LTA. So wonder does your LTA engagement, could sort of limit your possibility to push out the capacity expansion, if customers continue to pursue the demand?

Jason Wang

One is contractual obligation, including the timing. So, we are managing the equipment delay. So we're doing our best effort to fulfill our contractual obligation, not to impact our commitment to all the LTA customers. So the timing is fixed.

Sunny Lin

Got it? So maybe a follow-up question or a high level question. On the January earnings call, you shared your thoughts on the supply demand outlook for overall semiconductor [ph] foundry for next couple of years. Now after a quarter a lot of changes on the demand and also on the supply side. So one if you could share with us your latest thoughts on the supply demand outlook.

Jason Wang

I mean, for 2022, I think we remain -- our view on 2022 remains solid. In Q1 I think we gave -- we revised up the foundry industry growth will be about 20%, and plus. That view has remained unchanged. And UMC’s target to grow in line or higher than that foundry industry. I think that also is current. For 2023, if we look into the outlook, we remain cautiously optimistic on the market demand. The overall mega trends that UMC is focused on, I think that will continue to grow. But given the current market situation, we now we are more cautiously optimistic on that. Over the past few years, so the proactive market positioning and closely working with our -- the overall global leading customers, with our ROI driven CapEx, and I think oh this effort will help us to enhance our position financially. And we will continue to enhance the company profit even with this market dynamic. So at this point for the 2023 we are cautiously optimistic.

Sunny Lin

Understood, that's very helpful. So any expectation on the industry wide supply demand going to 2023 and 2025?

Jason Wang

Well, I mean we touched that earlier as well. Given the challenge in the supply chain, including all the shortage whether component or labors, they will be some increment delights. And I think some of the announced capacity may not come online on time. But so I think right now instead of commenting about the overall market in 2023 in terms of supply and demand, we feel comfortable about our situation. And given what I just mentioned earlier, given what we have changed these few years, along with our target market, the market maker trends along with the customer alignment. And we feel comfortable about our 2023 regardless of supply dynamics.

Sunny Lin

Got it. Thank you very much. My other question is on pricing. I think on January, or in January, you guided that for 2022 pricing to go up by about mid-teen percentage blended basis. But if based on second quarter guidance that may imply a limited upside into second half. Will that be a fair assumption?

Jason Wang

We guided that. And based on the margin ASP expansion in both Q1 and Q2, we're approaching our annual target right now.

Sunny Lin

Got it. So more further update on the full year pricing guidance, should we anticipate a bit of upside into second half?

Jason Wang

We will probably do that on ongoing basis, on quarterly basis, yeah.

Sunny Lin

Thank you very much.

Operator

Thank you. Next question, Szeho Ng of China Renaissance. Go ahead, please.

Szeho Ng

Oh, hi, gentlemen. I have two questions. The first one, in future, we are going to have three fabs running the 22, 28 nano classes. Just wonder how we are going to allocate capacity. Would that be based on customer or based on technology platform or based on region or countries as part of that being shipped?

Jason Wang

Firstly they are multiple configurations. And it’s not a simple answer to that. Not only from a customer alignment standpoint, you also have to think about the each size economics scales. So we don't want to run the product too fragmented in each size. So we are carefully examining the output capacity for size as well as the customer demand, and to align that. And so it's quite dynamic, complicated, but sophisticated. So I actually don't have a simple answer to that. But I can show you is very, very sophisticated process.

Szeho Ng

I see. So can we assume that basically the three fabs can basically support one another, the capacity can be fungible?

Jason Wang

Ideally, they are fungible. But again, the highest ability of fungibility, that will actually increase the cost of operating it. So you have to seeking a good balance of that. And while you mitigate the demand risk, and you have also achieving financial results. So it is a balance.

Szeho Ng

Okay, fair enough. Yeah. Second question. Equipment, I think it's pretty much well known in the market. But would you consider, let's say the mature no fab, auto mav [ph] and other areas of concern that may limit the final wafer output?

Jason Wang

I mean, yes. I mean, the answer is yes. It's actually lot more than that. So we are constantly working on productivity improvements on both space capacity as well as the new capacity and accelerating the ramp up. So they are multiple efforts activities. And meanwhile, we're working with the two supplier to shuffle in the power here [ph], and some of the different critical tools to minimize that as well. So it is a quite a bit of effort there.

Szeho Ng

I see. Okay, okay. Good luck. Thank you very much.

Jason Wang

Thank you.

Operator

Thank you. Next question, Nicolas Baratte, Macquarie. Go ahead please.

Nicolas Baratte

Yes, hi, good afternoon UMC. Could you give us an idea or a range of capacity increase by end of 2022, end of 2023? So, what I mean is, I understand there is equipment delivery uncertainty, I understand there is matching with customer capacity schedule. But if we think about P6 and P3let say that in both those fabs you're going to add 30K wafer in each, right. So two times 30K right? So when do you think we will have the timeframe when we see those 30K in production? So you've mentioned previously 46, beginning of 2Q ‘23. So it's still the case? And then for P3 what could it be? Thank you.

Jason Wang

I mean that, we kind of touched that for that, our last effort to address that landmark schedule for the 2023 piece. And the original plan is tied to having initial production in Q2 2023. And towards the end of the year, we can reach to hit the full capacity. And so that profile is still under alignment with the supplier. And our goal, based on those assumptions, and the support that we have aligned with our customer is also under evaluate. So we continue moving to that direction. However, I think the priority at this point is to ensure our customers commitment first.

Qi Dong Liu

For 2022 capacity increases, rather firm, we are talking about 6% year-over-year increase, which increased by 8% in 12 inch and 4% in 8 inch. And 28 nanometer capacity in 2022 will increase about 20% year-over-year. So because the P5 had additional things out in wafer, it's coming online as we speak. So this is more fragmented for this year.

Nicolas Baratte

Understood. Thank you very much. Last, second last for me, is I understand that the product mix can be difficult to quantify. So what you said to PC, mobile, smartphone weakness, I guess it's what everybody is saying. I also guess that depends on customer specific, client specific. But when you look at your 20% revenue growth, 20% plus revenue growth, I'm sure you have a smartphone PC model that could indicate some downsides to that 20%. What do you think is the range?

Jason Wang

So if I can recap your question, your question is, given our current forecast, what do we see about the decrease of PC demands, demand in related to PC notebook?

Nicolas Baratte

I mean you said, you feel pretty confident to have 20% plus revenue and then you said smartphone is weak but because you make for 5G, OLED and 4G TTDI the add for you actually, I guess you mean it's not that big, as much as OLED and 5G volumes are growing. So I understand that. Nevertheless I suspect there is some disconnect between lot of semiconductor expectation and very poor consumer spending data, or macroeconomic data that most of us are seeing in terms of, COVID lockdown in China, inflation in Europe and the U.S. and so forth, which are reaching -- especially the consumer inflation in some parts of the world is extremely high. So do you have a range around this 20% revenue growth?

Qi Dong Liu

Oh, well, first of all, we didn't really say 20%. We were talking about capacity increase and coupled with a meeting IC growth. Yeah, of course, that, according to calculation should be about 20%. And the President just mentioned, we still cannot fulfill our aggregate demand. And there are still some areas are showing very strong demand. So we are being able to fulfill any of the fluctuations for now.

Nicolas Baratte

Thank you. Very good. Thanks.

Operator

Thank you. Next question, Frank Lee of HSBC. Go ahead, please.

Frank Lee

Okay, great. Thank you. So I just wanted to follow-up on I guess that 20%, implied 20% growth. I think one of your foundry competitors had already talked about similar type of growth for them, or they going to exceed that. But they've kept the overall industry growth or foundry relatively unchanged? And given their market share, and given you're also sort of maintaining your forecasts for the full year to be largely unchanged. Does that imply there's more share gain that you're expecting this year, roughly speaking, because unless the overall industry growth actually is going to expect to be increased? I know, you guys never gave an explicit industry growth. But just trying to understand, I guess, the numbers that we're seeing right now. And what -- is it more implied share gains that you expect this year?

Jason Wang

Well, you're right. And given while we have implied that our target is to grow in line or higher than the foundry industry. So that means yes, it is a share gain, yes, that is aligned to our target.

Frank Lee

Okay. All right. Thank you for that. And then I guess the other thing, a second question I have is, I think you’ve mentioned in the past that 28 nano mode, potentially can be a little softer into next year, in the past -- previous analysts meetings? Is that still a view that is being shared right now, by management? Or is there any change there?

Jason Wang

I think our message here was that we believe that 28 will be a sweet spot for many applications, as well as some of the new products which will migrate to 20. So we do believe 28 demand will continue to grow. And our strong 28 product pipeline, we have aligned with our technology, with industry’s mega trends. And along with the endorsement from the global leading customer on LPA, we have a confidence that our 28 millimeter capacity expansion are well protected. And so we -- I think we actually feel pretty comfortable with that.

Frank Lee

Okay, so it's more of a -- the protection is more company specific on 28, because of your product mix, and in terms of your agreements?

Jason Wang

As well as the focus on market that we are addressing. We believe are linked to the mega trend, yes.

Frank Lee

Okay, great. Thank you.

Jason Wang

Sure.

Operator

Thank you. Ladies and gentlemen, we're running out of time. So we're taking the last question. And the last question would be Patrick Chen of CLSA. Go ahead, please, Patrick,

Patrick Chen

Hi, thank you for taking my question. Can you talk a bit about this DENSO partnership, aside from the fact that they are based in Japan and [indiscernible], what do you have in Japan? What are the key differences of producing these IGBT on 12 inch instead of 8 inch? What are the benefits and challenges? That's number one. And number two, can you talk about the first quarter non-component or a segment contributed to the non-1Q number. These are my two questions. Thank you.

Jason Wang

For the first question, yes, the program that we have with DENSO is under the 12 inch IGBT. And it's our belief, given our diligence shows the moving into a 12 inch serving multiple purposes and benefits. One is performance, and cost as well as the supply. The 12 inch is giving out the alternative solution to current supply constrain in IGBT space. And so we'd expect, that our module will continue to grow. And we think this will serve that and will be beneficial to both DENSO and UMC. And on the other hand is the specialty technology is what UMCs focused. And we do believe there will be more specialty technology required to fulfill the automotive application and this sense of cooperation will the highlight to our ongoing effort in providing the support to the automotive market without specialty technology. So maybe Qi Dong will help with your second question.

Qi Dong Liu

Yeah, in terms of Q1, about NT$900 million is ForEx gain. And NT$500 million is mark to market value gains from our investment. And it's also $300 million interest expenses. That the bulk of in Q1.

Patrick Chen

Thank you very much.

Operator

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

Michael Lin

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.

Operator

Thank you. And ladies and gentlemen, that concludes our conference for 1Q ‘22. We thank you for your participation in UMC’s conference. There will be a webcast replay within two hours. Please visit www.umc.com under the investors event section. You may now disconnect. Goodbye.