UMC Gross Margin Misses Expectations, Target Prices Cut

United Microelectronics Corporation (UMC) recently released its earnings guidance, revealing a gross margin performance below market expectations. This news came as a surprise to analysts, leading several foreign institutions to adjust their target prices for UMC's stock. Notably, Nomura and Daiwa Capital lowered their target prices by 12.2% and 7.5%, respectively, while Morgan Stanley (MS) maintained a "Neutral" rating, and Jefferies kept a "Hold" rating.

UMC's stock price faced significant downward pressure, opening with a sharp gap down on January 22, 2025, and ultimately falling by 2.75 points to close at 40.2, a 6.4% drop. This decline stood in stark contrast to the broader market, which saw the weighted index rise by 225 points, closing at 23,525 points.

According to Nomura, UMC's non-AI business visibility remains low, compounded by factors such as rising depreciation and declining gross margins. As a result, Nomura has revised its 2025 earnings per share (EPS) forecast from NT$3.93 to NT$3.43, and lowered its target price from NT$57 to NT$50. Despite the downgrade, Nomura maintains a "Buy" rating on UMC, citing the company's underperforming stock price and market expectations. Nomura believes a recovery in UMC's non-AI business is essential for the company to outperform the market.

Daiwa Capital has also revised its target price for UMC from NT$53 to NT$49, reflecting increased competition in the mature process node market and higher-than-expected depreciation rates. However, Daiwa continues to rate UMC as "Outperform," noting that UMC's senior management shares their view that a broad recovery in non-AI chips this year will benefit the company. Additionally, geopolitical factors could help UMC expand its market share in the 28/22nm process nodes. Daiwa recommends taking advantage of the lower stock price for long-term accumulation.

Morgan Stanley has kept its "Neutral" rating and a target price of NT$50, pointing out that while UMC's Q4 2024 revenue met expectations, its gross margin of 30.4% fell short of the forecasted 31.8% and the market's 30.6% estimate. Due to UMC's high capacity utilization exceeding internal projections, Morgan Stanley expects continued pressure on pricing and gross margins this year, not only from Chinese manufacturers but also from TSMC.

Jefferies has maintained its "Hold" rating and a target price of NT$43, noting that UMC's Q4 2024 revenue and Q1 2025 revenue forecasts were generally in line with expectations. However, its first-quarter gross margin was lower than anticipated, attributed to price adjustments and earthquake-related impacts. Jefferies has downgraded UMC's 2025 EPS forecast by 13% and its 2026 EPS forecast by 7%, to reflect price reductions and slower growth. Jefferies believes that UMC will need new growth drivers to maintain its capacity utilization and momentum.