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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone, to UMC's 2020 Third Quarter Earnings Conference Call. [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. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.
Thank you, and welcome to the UMC's conference call for the third quarter of 2020. I'm joined by Mr. Jason Wang, President 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 President's key message to address UMC's focus and the fourth quarter 2020 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 Financial 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 risk that may be beyond the company's control. For this risk, please refer to UMC's filing with the SEC in the U.S. and the ROC security authorities.
Now I would like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's third quarter 2020 financial results.
Thank you, Michael. I would like to go through the third quarter 2020 investor conference presentation material, which can be downloaded from our website.
Starting on Page 3. The third quarter of 2020 consolidated revenue was TWD 44.87 billion, with the gross margin at 21.8%. The net income attributable to the stockholder of the parent was TWD 9.11 billion, and the earnings per ordinary shares were TWD 0.75.
On Page 4, the income statement quarter-over-quarter comparison. Revenue grew 1.1% sequentially to TWD 44.87 billion based on the combination of shipment increase as well as ASP increase. However, the strengthened NT dollars offset more softer gains from shipment increase as well as ASP increase.
Gross margin, as a result of the stronger NT as well as the higher summer utility costs, declined 4.8% quarter-over-quarter to TWD 9.77 billion or 21.8% gross margin.
Operating expenses stayed relatively flat to last quarter. However, this is -- 2 factors affect the operating expenses. The positive one comes from, we have a reversal of expected credit loss. We collect the payables from one of our customers, which is around TWD 500 million also. But at the same time, given that we have to retain our talents and by issuing certain equity-based compensations to the key employees and the management, so the compensation cost is also increased by around $400 million plus. And the collect of expected credit is a one-quarter event. However, the increased compensation based upon equity-based scheme is going to linger in for multiple quarters.
For the net other operating income and expenses, also, we see 2 one-off factors, You can see that most of our net other income expenses, the quarter is roughly about TWD 1 billion. But in the third quarter, it went up to TWD 2.8 billion. Based upon one is the once a year annual interest expense subsidies in our Xiamen fab, that's around TWD 500 million plus.
Also we sold NexPower, one of our solar subsidiaries, the factory we sold with a profit around TWD 1 billion in the third quarter. So that's the main reason we saw the net nonoperating income jumped to TWD 2.8 billion in the third quarter.
Operating income as a result increased to $7.1 billion or 15.9% after operating margins.
For the net nonoperating income expenses, please refer to our page report -- quarterly report on Page 4. It's actually quite clear that in the third quarter of 2020, we booked a net investment gain of around TWD 3.9 billion because of a strong financial market.
Also we also recognized the $60 million fine we settled with US DoJ, which is already reflected in our third quarter nonoperating income numbers. So that's the Page 4.
So on Page 5, for the first 9 months of the year, revenue grew 23.7% to TWD 131.5 billion, as our newly acquired Japanese fab contributed around 10% of the 23.7%, and the rest is really the organic growth from UMC's higher utilization rate as well as better product mix.
Gross margin, as a result, jumped to 21.4% for the first 3 quarters of the year to TWD 28.1 billion.
Operating expenses, because of the combination of our 12M in Japan, so the overall operating expenses is getting higher. And the net operating income, as I explained earlier, the main difference is really the sale of our solar subsidiary, NexPower, of about TWD 1 billion.
So operating income grew almost 5x to TWD 16.3 billion or 12.5% gross margin -- operating gross margin, and the net income attributable to the stockholder of the parent is around TWD 18 billion. And EPS for the first 3 quarter of 2020 is TWD 1.5, which is 3x of the same period of last year.
So for Page 6, our cash level remained around TWD 100 billion also, with total equity around TWD 220 billion.
On Page 7, ASP edged up slightly in the third quarter, and we will give guidance later for Q4 ASP outlook.
On Page 8, Asia now is 57% of the total revenue breakdown, and Japan because of certain customer lost some high-end business declined from 9% to 7%.
On Page 9, we see some up and downs among our IDM customers. And therefore, they offset each other and remain at 12% as total pie around -- in the third quarter of 2020.
For segment breakdown on Page 10, communication now is around 54% and computer and consumer remained somewhat unchanged.
On Page 11, we can see that 28-nanometer continued to grow from 13% last quarter to 14% this quarter, and we expect the trend will definitely continue into Q4. And 65-nanometer is strong with 19% of the breakdown. And 90-nanometer is weaker, came down to 10% in the third quarter of 2020.
On Page 12, this is the quarterly capacity table. We do expect to see more capacity coming on stream for our 12X in Xiamen.
And the last page on 13 -- Page 13, our CapEx for year 2020, the run rate, and most of the goal will remain around $1 billion unchanged.
And that's a summary for the whole UMC results for third quarter of 2020. More details are available in the report, which can be done -- which has been posted on our website.
I will now turn the call over to President of UMC, Mr. Jason Wang.
Thank you, Chitung. Good evening, everyone. Here, I would like to update the third quarter operating result of UMC.
During the third quarter, consolidated operating margin reached 15.9%, while utilization rate remained at 97%. Wafer shipments reached TWD 2.25 million, 8-inch equivalent wafers.
During Q3, work from home and home schooling trends continue to contribute to stable end market demand for application in wireless connectivity, power management IC used in smartphone as well as high-speed interface IO controllers found in the computing device.
In addition to demand stability across various end markets, our 28-nanometer revenue grew quarter-over-quarter as customer product tape-outs continue throughout the quarter. Moving forward, we expect to see a sustained increase in the number of 28-nanometer tape-out, which will further diversify our 28-nanometer exposure to end markets and customers.
Looking into the fourth quarter, demand from consumer and computer-related applications will lead to a minor increase in wafer shipments, propelled by ongoing work-from-home initiatives and home schooling. Furthermore, we have seen an uptick in semiconductor demand due to more silicon content, in particular applications such newly adopted -- deployed 5G smartphones, IoT devices and other consumer products. Therefore, current industry landscape appears to show favorable supply and demand dynamics towards foundry. Hence, UMC will pursue a delicate balance in strengthening our customer relationship, while securing interest for our shareholders to ensure our long-term growth.
Let's move on to the fourth quarter 2020 guidance. Our wafer shipment will increase by 1% to 2%. ASP in U.S. dollar is expected to increase by 1%, however, surging NT dollars to offset all that benefits on Q4 shipments and ASP growth. Gross profit margin to remain flat, despite adverse currency impact. Capacity utilization rate will be in the mid-90% range. Our 2020 CapEx budget will be USD 1 billion.
That concludes my comments. Thank you all for your attention. Now we are ready for questions.
[Operator Instructions] Our first question is coming from Randy Abrams, Crédit Suisse.
Okay. And congratulations on the good result. I wanted to ask the first question, a 2-part on the pricing outlook. If you could give the outlook for ASPs over the next couple of quarters, factoring in the rising foundry pricing on some mature nodes. And also you talked about further 28 ramp up.
And then the second part of it is, I think the last line in your remarks were about balancing the strengthening relationships, while also securing shareholder value. So I'm curious, just the risk you're seeing in terms of, if you are lifting pricing versus other foundries seeing a stable pricing model, if any risk on market share or pricing if we do head into a downturn.
Okay. Sure. First of all, thank you, Randy. And as far as the pricing question, despite -- we mentioned it from last quarter and just earlier that despite the UMC's pricing power, we believe, it has been much improved, especially on the 8-inch business. However, we always try to keep our commitment to our long-term customers. We have been taking advantage of this opportunity to strengthen the customer relationship and enhance the product portfolio pipeline, which will ensure the UMC long-term market position.
And at this time, we have settled the 2020 pricing and allocation with our customer. The outlook for 8-inch business appears still favorable for foundry, but the 12-inch ASP will remain firm based on the normal pricing scheme. The overall blended ASP improvement is still subject to actual product mix.
For the near term, the Q3 and Q4 '20, the pricing adjustment was only applicable to customers that require incremental capacity support, so that will probably give you a favor of the near-term Q3, Q4 as well as some of sort of the outlook for 2020, '21.
You talked about the -- you mentioned the effect on the 28-nanometer contributions. In Q3, the higher 28-nanometer ASP contribution was mainly offset by the changing in the product mix. We actually see some benefit -- I mean, the benefit of the product mix on 28, but it still got offset by some other product mix. An example is the decline in our 90-nanometer product, which were designed into a high-end market. That led the ASP was not as apparent, even with some of the improvement on 28 revenue contribution. So for -- that's for the pricing answer.
The -- when we talked about the -- try to seeking the balance between the shareholder interest as well as the long-term customer relationship strength and the customer relation, we're mainly talking about that as we -- going into this few quarter as well as with the outlook for 2021. We continue seeing the business outlook remains pretty firm as we expect the business traction will continue into the 2021. So the overall business outlook, that is healthy, so that means the utilization situation will remain very full.
And in that sense, we carefully evaluate our CapEx position and consider whether how should we expanding our capacity in supporting customers. But in the same time, we need to watch the balance for the shareholder interest. So that's what we're referring to there.
Okay. Appreciate the color. Maybe a couple of follow-ups to that. First, for the pricing where you mentioned this year, it's only on the incremental business. If there's a way to get a feel on how it's looking at this stage for the pricing for next year.
And the second part of that would be on gross margins, just on your view that you'll be near full capacity, good pricing, 28 rising and also maybe depreciation down, how you feel the gross margin may be trending.
Well, first of all, when we look at the gross margin, we were a bit of disappointed for Q3 because the Q3 was largely affected by the appreciation of NT dollars, right? So the NT dollar -- the foreign exchange rate definitely had some impact to our gross margin, and we will be expecting will continue trending up.
Now despite the NT dollar impact, it's our expectation and goal to continue to see the gross margin trend going up, okay? And following the better product mix and also the continuous -- the utilization -- high utilization.
Okay. And then if I can ask a question, then you caught off a 90 node, where, I think, down a good bit from where it was a year ago. So that pocket, I'd assume, is the one with underutilization. Is there kind of a new application to backfill or with capacity tight, you can migrate some of the tools to other nodes?
Okay. The major reason for the 90 nanometer, the decline or impact was due to a decrease in wafer demand from our Japan region. In particular, this impact affects our 12M, the Japan fab. And as -- one of the important customer is experiencing some deteriorating business conditions, which beginning in Q3.
You asked whether we'd be able to backfill with other devices, and we already started. We kicked off the -- we started the mitigation program and the -- this quarter and the expected 12M loading will gradually improve. We can't really improve immediately because we have to bring product over and we have to make some modification to it, so the loading will gradually improve each quarter.
In Q4 2020, the next quarter, the 12M loading will be the trough of UMC has begun to leverage our other customer base. And so we expect the duration of this recovery mode will probably less around 3 quarters coming from current quarter. So we should start seeing some sign of recovery from Q1 and continue recovering that to a much normal level.
Okay. And just one other follow-up because you mentioned the CapEx, you're doing a consideration now that you're full. Should we view base case? It's been around $1 billion that, that's the level we're looking at when you're expanding or potential at high utilization could start to advance. And how are you thinking about like a build versus buy on some of the mature nodes where capacity is tighter?
Both are important. Both are options to us. The -- for the CapEx decision, we are constantly discussing that in [indiscernible], but since we're going into the Q4 2020, we're going to quickly finalizing our 2021 CapEx plan. So the 2021 CapEx will be disclosed during the next quarter conference call.
And just a note, each of our CapEx investment will still examined carefully through our -- the stringent ROE justification. So as we promise our shareholders as our internal policy, so we will continue managing under that principle.
And the next question is coming from Gokul Hariharan of JPMorgan.
Yes. And congrats on the good results. First question I had is how should we think about margins, especially gross margins over the next year or so. Obviously, as Chitung had pointed out in the past calls, 2022, we are expecting a meaningful drop-off in depreciation.
But between now and then, given that we are already running at about 95% to 97% utilization, should we think that gross margin is likely to stay in this early 20% level and then we kind of get to meaningful drop-off in depreciation and improvement in gross margin in 2022? That was my first question.
Okay. I think it's difficult for us to predict the gross margin rate. But as Jason just pointed out earlier, it is certain, our goal continue to find opportunities and optimal process to enhance our gross margin. And of course, we are heading -- we have some headwinds from the currency for this quarter and also likely next quarter, so that kind of eat up about at least 1.5% to 2% of our gross margin. So currency certainly play a quite important role in the near term.
And longer term, we do expect to see better ASP coming from our product mix enhancement, also our 28-nanometer ramp. So we do see quite a few factors will help our overall gross margins. And certainly, it is our goal, but just we cannot really predict what's that number for our gross margin for the longer term.
Understood. If we think about going into next year, given the very tight capacity that you're seeing in -- especially in mature nodes, do you plan to go down the acquisition route again on some of these mature nodes? What is the thinking regarding capacity expansion? I think you talked about some selective expansion in 28-nanometer, but could you talk a little bit about what are your plans on the mature node side as well?
Well, I mean, we also touched that earlier. We continue exploring both options, both organically and inorganically. The -- so the answer is yes, we are always open to exploring new opportunity that will help the company growth, okay, on both ways. So if a viable business is made, we will do both, okay?
We think that this year's CapEx, we are putting additional capacity in our 12X, the Xiamen facility. We are maxing up to a 25,000 per month run rate. And we have a -- we feel comfortable about that capacity, and we have confidence that we will have good momentum to build that fab.
And so the outlook remained pretty firm to us at this point. And at the same time, we'll continue exploring others. And for that additional capacity are mainly for the 28-nanometer product.
Okay. Understood. One last question on OpEx. How should we think about OpEx? I think OpEx ratio has been coming down in the last year or so, but in terms of OpEx and R&D expenses, are we basically going to stay at around these levels over the next couple of years? Or are there some increases for some of your specialty products in 28-nanometer expansion?
Yes. Other than the one-off impact in the third quarter of 2020, which I mentioned, one is the reversal of expected credit loss. So there was a gain of around $500 million. But at the same time, we also increased our equity-based compensation schemes to our employees. So there also increased our OpEx by another $400 plus. That's going to last for multiple quarters.
So in absolute dollar term, we expect the OpEx to increase starting from Q4 of 2020. But of course, for the longer term, as a percentage of revenue, we hope, it is our goal and duty to keep the ratio somewhat flat or even come down slightly.
And the next question is coming from Bruce of Goldman Sachs.
So I want to ask more about the 28. So what is the current utilization rate for 28-nanometer in third quarter and the fourth quarter?
The -- let me take look at this. The 28-nanometer right now is the mid -- about mid- 90s for the quarter, and we expect the 28-nanometer loading will actually continue to increase quarter-over-quarter.
So 28-nanometers is already a 90-plus percent utilization rate.
Yes. In the Q4 '20, our current projection is at mid-90s. Yes, it's over 90% utilization rate.
What was it in third quarter?
Third quarter is also over 90%, but it's not reaching the mid-90% yet.
I see. So given the high utilization rates, so what is the capacity expansion plan for the 28-nanometer because since we already that very, very high utilization already?
The capacity will be -- in the 28 will increase in -- starting from Q2 2021, and the number will reach about by end of 2021, we'll probably see about 42,000. From the end of the Q4 2020 is 34,000. So there is approximately 8,000 increase on year-to-year basis. And the number will start ramping in Q2 of '21.
I see. Okay. Because of the CapEx, I just saw that you only spent about like $500 million year-to-date, so we didn't really see the spike in terms of CapEx compared to last year. And given the high utilization rate, so I'm just surprised that we did not see a more aggressive CapEx or capacity expansion plan for the 28.
Well, I mean, we have been leveraging what's in the existing pool, and we've been cautiously deploy our CapEx plan. And following today's Board resolution, I think you will see announcement that, along with today's CapEx approval, the number is actually going up quite a bit today.
I see. Understood. So another question is for the gross margin. So what is the ForEx impact for the gross margin in third quarter? And what would be the gross margin guidance, assuming the same ForEx? I mean, I just want to know what is the real gross margin improvement, excluding the ForEx factors.
So back to our Q4 guidance, we are guiding 1% to 2% shipment growth and 1% ASP growth, but that's all going to be wiped out by ForEx. So that's the magnitude of the ForEx impact for gross margin in Q4. For the magnitude in the third quarter, it's a little bit less than that of Q4.
A little bit less than what's the impact in third quarter. Is that right?
A little less than that in Q4.
Your next question is coming from Szeho Ng of China Renaissance.
My first question is regarding the noncontrolling stake. In Q3, the number has actually come down quite a bit. I just want to know if it's one-off or any specific reason for the drop.
You mean, noncontrolling interest.
Right, the minority interest.
Yes, that's because the key operation is our Xiamen fab, and their loss in the third quarter is much less because of the one-off annual -- once a year interest expenses subsidies received for the third quarter.
Okay. Got you. And is the interest subsidy would continue for next couple of years in Q3 every year?
Either Q2 or Q3, it will continue for a couple of years. But the debt outstanding should gradually come down as we gradually pay off the debt.
Okay, okay. And second question, back to the gross margin. Is it possible to talk about the gross margin difference between 8-inch and 12-inch? And I believe that 12-inch gross margin will be lower, right?
Yes, we don't really show that kind of breakdown. And -- but as you can imagine, the overall depreciation unit cost for 8-inch is much lower than that of 12-inch. So accounting margin-wise is 12-inch based upon a full loading condition. Right now, it's certainly higher than that of 12-inch.
Okay, okay. Yes. And last question on R&D, how should we model the figures going forward? Should it be quite steady from absolute dollar level?
Sorry. Say that again.
The R&D, how should we model it going forward? Is it going to be kind of stable on absolute dollar basis?
We believe it will remain stable for the foreseeable future.
And next, we'll have Charlie Chan of Morgan Stanley for questions.
And congratulations for great results. So I've got a couple of questions. First of all, it's more about the short term because there seems to be some trends. Some customers who want to transfer the project to your foundry given concern about the SMIC continuity. So does the management also see the similar behavior from customers? And how long do you think they can sustain?
So -- well, first of all, it's our policy that we are not commenting our competitors. And as far as the question you're referring to, it's more of a geopolitical tensions that it's our belief that did have some impact to the foundry landscape, particular to the customer sourcing strategy, right? And we have observed some of the customers have decided to diversify their foundry sourcing strategy and started some of the business explorations, maybe not only with UMC, but the -- -- at least, activities being associated with that. In due course, we will try to capture those opportunity if we could. And as long as it will be subject to our capacity availability as well as our customer alignment based on their wafer requirements.
So the current priority of ours at this time is still serving our existing customers first because you know we are running very full. And it's our job to supporting our current customer and strengthen that partnerships. And -- but continue enhancing our market position based on available technology and capacity is also our goal. So -- but our priority is serving our existing customer first.
Yes. Okay. Yes. And also related to this, right, I know your fab is very busy, and I understand that your pricing for 2020 is already set, except for some rush orders or incremental demand. But when you have kind of a new startover for the 2021 business discussion, do you plan to kind of revise up your wafer price to all the customers? So there's no discrimination just that because the -- it's all about demand and supply, and you want to kind of hike the price to all your customers in 2021.
Well, the -- yes, I mean, we -- I mentioned earlier, we are seeing -- we have -- the landscape has changed it. And we -- particularly in 8-inch advanced node area, so the answer is yes. The -- for the 8-inch business, we are settling those 2021 pricing now, and there is a baseline adjustment. Okay. Yes, there is. And the -- but we're still limiting at the 8-inch business.
The 12-inch ASP will remain firm based on a normal pricing scheme. So yes. So we haven't making any adjustment from a 12-inch standpoint, but mainly on the 8-inch side.
Okay. Sorry, I missed that. So can you quantify the magnitude of the baseline pricing change for 8-inch?
Well, the message here is because the -- we always look at from a blended ASP standpoint, so It's very hard to quantify that. Even we quantified that, it's not -- it can't imply what's the end result.
The overall blended ASP improvement was still subject to the actual product mix based on the loading. For example, if we have better 8-inch productivity improvement, that means if we're shipping higher percentage of 8-inch wafer, the 12-inch is still up, despite the baseline 8-inch pricing increases, we're still going to drive down the overall blended ASP.
So it's difficult for us to quantify that. It's better to referring to on the quarter-to-quarter guidance because we will provide the ASP guidance on a quarter-to-quarter basis, yes.
Okay. And lastly, I think it's really a good move that you placed and settled with the U.S. Department of Justice. So can I confirm this is already settled and there's no longer compensation expense afterwards? And also between you and the Micron, do you think there is also a lawsuit to settle? Or do you think it's also already complete, along with this U.S. DoJ settlements?
The criminal case with DoJ is settled and the $60 million fine is reflected in the third quarter financial statements. And for the civil case with Micron, that's still ongoing. And we don't speculate the result, but we will try our very best to defend our shareholder -- our company's right and shareholders' rights.
And the next question is coming from Roland Shu, Citigroup.
Yes. Congrats for the very good result. And my first question is for the 28-nanometer. So I look at your 28-nanometer, I believe, in 3Q, your capacity for 28-nanometer should be much bigger than your capacity in 4Q '16, which was the peak of your 28-nanometer revenue.
And also you comment in 3Q, you loaded your 28-nanometer capacity at above 90% utilization. So I think the 28-nanometer wafer shipment in 3Q this year should be much bigger than 4Q 2016. However, I look at the revenue point of view. In 3Q, your 28-nanometer revenue probably was only 83% of same period in 4Q '15. So is this the more wafer shipment? However, with this much lower wafer revenue coming from the product mix change, and can you give us more color on what exactly have changed in the product mix on 28-nanometer?
First of all, 5 years is a very long time for pricing trend in the foundry business. So if we compare it to all the electronics products 5 years ago, I think it will be very, very different. So it's not only foundry. We just don't compare this kind of issues with a 5-year interval. And certainly, the product are also different compared to 5 years ago. So I think it's a difficult way to even try to compare to 2015.
I think all we're trying to do here is to fully utilize 28-nanometer capacity and moving to high end as much as we can, and we also diversify different clientele for our 28-nanometer. And we are moving our 28 to 22 as well to increase -- enhance the competitiveness for both ourselves and our customers.
So we're pretty happy with the progress we made for 28, and it has been within our plan. And for the next coming quarter, we do expect the 28% -- 28-nanometer as a percentage of revenue to show a meaningful increase quarter-over-quarter.
Okay. And then you said that end of this year, the 28 capacity will be reached at 34,000 wafer per month, and this actually is above the economic scale for 28-nanometer. So are you expecting your 28-nanometer gross margin to reach corporate average in 3Q or in 4Q, any time soon?
Again, we don't really have a detailed breakdown by geometries. But yes, when the 28 was running at nearly 95% capacity utilization rate, we do see a similar corporate gross margin compared to the rest of the 12-inch node. But we also are expanding. We are putting new CapEx in our Xiamen fab, moving from 18,000 wafers right now to 25,000 by mid of 2021. All the newly increased CapEx and also depreciation will certainly put pressures on the gross margin for our Xiamen fab.
So our Xiamen fab, even though we have seen performance being improved compared to year 2019 by a good margin, still, they are in red in terms of margins. So overall, if you plan with the new CapEx and new depreciation, 12-inch -- 28-nanometer is not going to be at corporate average because of the Xiamen fab.
Understood. My last question is for your lawsuit settlement. You -- I think that in 3 months ago, before you believe there was no round 2 from UMC for this case. But now you admit there is 1 trade secret breach. So can you elaborate for the change you are putting? Why previously you thought later there was not round 2, but now you think there is one trade secret breach?
It's very clearly stated in our news release that under U.S. laws, company has to be responsible for employee behavior. And the employee did break the law by -- he violated the company policy and also performed without the knowledge of top management. So that's where the one comes from. That's a different scenario under the Taiwan law.
Understood. So this is mainly -- you pay the $60 million mainly for employees's fault or are in place around the win.
It's very clearly stated in our news release.
So it's our position to pleading guilty means UMC recognized and accepting the liability of the action of the certain employees.
And the next question is coming from Nicolas Baratte, Macquarie.
Yes. A boring question somehow for Chitung. So you've explained a lot of detail. The other operating income and expenses, which go in the TWD 2.8 billion, right? On the nonoperating side, you also have a pretty, pretty big number there at $2 billion in 3Q. And sorry, maybe I didn't hear what you said about tax, but you also have a very low tax rate in the third quarter.
So for the non -- other operating income with sale of the solar power subsidiary, NexPower, facility for a gain of about TWD 1 billion, so that's included in the TWD 2.8 billion numbers for the other operating income.
For the nonoperating income, it's mainly the valuation gain from a strong capital market, which UMC recognized about $3.9 billion gain from the financial market -- our capital market gains, but offset by about $60 million fine we paid to DoJ.
So the USD 60 million fine is in nonoperating costs.
Yes, that's right, nonoperating.Yes.
Okay. Understood. And the tax rate, Chitung, and what about the tax rate?
Tax rate is a little bit complicated. We do enjoy certain tax break for some of our overseas operations. So blended tax rate is probably less than 5% to 10% this year. And right now, it's actually lower for the third quarter, but grew up for the whole year. I do expect to see about 5% tax rate for 2020, but it will eventually be somewhere between 10% to 15% should the tax break in third quarter that gradually matured.
Okay. Another 2 questions, if you don't mind. Number one is, what do you expect is the impact of the Japan fab on margins and OpEx for next year? Does it tend to lower margin or increase margin, increase OpEx, lower OpEx? What should we think about here?
Japan fab in terms of impact for OpEx will be stable for the next few quarters.
In percentage.
However, the President just mentioned one of the major customers is having a more deteriorating business outlook for the -- one of the high-end products, so they are in recovery mode right now. So Q4 will be the trough of the loadings. And also their margin will be below corporate average in Q4 and gradually to pick up over the next couple of quarters.
Understood, understood. If you don't mind, the last question about 28-nanometer, so it looks like already is very impressive in the 28-nanometer. Revenue has been increasing, the 28 node revenue in U.S. dollar has been increasing. In the first half of the year, it was 25%. And in 3Q, it's 75% year-on-year, right? And Q-on-Q, it's also a very big increase of 40%, right? So how many new products or new customers or new stuff do you have in 28-nanometer from 3Q '20?
There's no specific numbers here. But yes, in Q3, our 28-nanometer, from a revenue standpoint, we are experiencing many new products, right, from wireless application as well as computing-related products. And the -- we see more and more diversification on our product line in the 28-nanometers, and -- which we've got to see, and this momentum actually will continue. It continued into Q4. We foresee the 28-nanometer contribution will continue to grow as we reported earlier as well. So yes, I mean, we don't have a specific product comps, but there are many products ramping starting from Q3 already.
And the next question is coming from Sunny Lin, UBS.
And congrats on the very good results. So I have 2 questions. Number one is on your 8-inch. Management has been reiterating to focus on improving the technology capability for mature process and, therefore, the product mix. So now that your 8-inch is basically full, and I think you could be a bit more selective, so wondering how would your mix evolve in the next 2 to 3 years. And my second question is regarding raw wafers. Well, I think the expectation by the industry is that 2021 should be a better year with end market recovery. and considering that raw wafer has been over -- undersupply in the past, I just wonder, how would you do differently this time around in buying raw wafers? That's all for me.
Sure. So in terms of the 8-inch, from the product mix and the mix improvement standpoint, that is continuous efforts. Especially with the 8-inch advanced node area. 8-inch advanced nodes qualify anything under 0.18 micron, and so anything under that will considered to be advanced. And we see many application coming into the 8-inch advanced area, so we -- the product mix improvement effort is continued.
For the -- for anything that's greater than 0.18 has behaved a little different. There are different application coming into that, but I won't consider that actually as a better mix because of many of the mature 8-inch migrating to the advanced 8-inch.
So the key focus on the mature 8-inch is twofold. One is we'll try to upgrading our facility so we can convert some of the mature technology capacity into advanced node and to serving the high demand of the advanced 8-inch area.
The second is by developing a new technology to adapting the new applications, okay? So from the -- from a mix standpoint, I think the mature side will stay pretty flat and go -- try to continue fully low in the area versus the advanced 8-inch will continue to improve the mix and to also enhance the blended ASP. So that's sort of respond to your 8-inch question.
For the wafer substrate materials, after the last experience, we have examined our relationship with the -- our suppliers. So now that we have a long-term contract arrangement in place now and -- for the old suppliers, and the -- and we continue the ongoing discussion with those suppliers, at the same time that we try to qualify multiple source on different product lines. So by doing that, we'll actually be able to secure our supply with more competitive solutions. So that is pretty being adapt after the last experience that we have. And we -- so far, we feel comfortable about that, but the result of that, we have to remain to be seen.
Got it. A very quick follow-up. So would it be fair to assume that for 2021, most of your long-term contract should have been finalized and with maybe reasonable pricing?
I will say so. I think so the -- it still sound -- there are some already settled, and there are some still under negotiation. But yes, I think, the -- it's kind of thing, I said the -- it meets our expectation at this time, yes.
And the next question is coming from Sebastian Hou, CLSA.
First Is to follow on the 28-nanometers. So I think Chitung already mentioned about we should expect the 28-nanometers could be -- could drive the margin higher from here. So can you explain further details about what could drive the -- what could drive 28-nanometer's profit higher from here given that it's already running mid-90s -- or 90% plus utilization rate.
Mainly, one is from our Xiamen fab, currently, the rather big loss, and the loss has been reduced year-over-year. And we do expect to see the structured profitability for Xiamen fab to be meaningfully improved after they reached the 25,000 economy of scale operations, which is by the mid of 2021. So that's -- the smaller loss coming from Xiamen will be a way of 28-nanometer margin enhancement. And of course, we will continue to see upgrade from 28 to 22 and also better product mix for 28, and that will also help.
Got it. So your Xiamen fab right now is 17,000. Is that right?
About 18,000 now already.
18,000. So from 18,000 to 25,000 there, you can make a big difference in terms of economy of scale.
After we reach 25,000, the full size, we will see potential to see even further cuts in terms of loss.
Okay. Great. Second question is on the inventory. I think some of your peers are pretty sanguine about the inventory situation on your customer side, although that has been above average for multiple quarters already. I'm curious about how's your view on the inventory situation on your customers. And how do you see -- what was your view on this everlasting high inventory situation? Is it the new normal?
Well, I mean, first of all, you're right. I mean -- and also from other observation that you say the inventory was at a high level. We are -- what we think we have seen quarter-over-quarter decline in inventory given the end market has started to recover. But the data -- yes, the data did show, the inventory level at this time is still at a higher than the normal level. So despite that, we see some quarters declining, but the current inventory level remains at a higher level.
Now whether if this situation is -- will become a new norm, that remains to be seen. We believe it's in a higher level, but we see because the higher content of some of the -- higher silicon content on some of the devices and because of the pandemic situation, whether this high-level inventory can be a new norm. That is a possibility. It's still too early to judge at this time and -- but we will continue monitoring that progress.
Okay. One follow on that is given that the capacity is pretty tight right now, it's everywhere, a leading-edge foundry and also trolling edge and everywhere, so when you communicate where -- with your customers, do you see any gap between your customers' order and behavior versus your internal forecast on the demand, i.e., whether there could be some overbooking behavior because your customer just afraid of not getting enough capacity?
Yes. I mean, this is the conversation -- this topic is a conversation happening on a daily basis. The interesting thing is if you look at the inventory, it may not be within our customer space. It could be the -- in a certain entire -- it could lay on -- somewhere in the supply chain. It could be at a system level or electronics level, but not necessarily on the silicon level.
So we have been constantly check with our customer and, well, hoping they're checking with their customer. And this type of conversation is ongoing. People are concerned about this, whether there is a double booking situation.
But at this point, we -- I would say, people that we've been talking to, as well as ourselves, we -- no one can judge whether this is a new norm or there's going to be an inventory correction coming up soon because it's just -- we have to continue seeing this thing through.
Now there are some precaution measures that we can do. Hopefully, we're putting more resource on the area that really are in shortage, and so maybe have a high priority versus the others.
And again, it's delicate process. It's not as straightforward. But I mean, I think not just us, the entire supply chain is finding their best, trying to mitigate this situation here. And we just have to -- we have to sit and see what's going to happen.
But I mean, right now, I mean, the demand coming out of our customer remains very solid and very strong. And we're doing due diligence. And hopefully, we're just making a good decision here.
[Operator Instructions] And the last question is coming from Bruce of Goldman Sachs.
I want to double check my understanding about the gross margin for the ForEx impact. So for the fourth quarter, the ASP is going up by 1% to 2%. Your shipment is 1% to 2%. So the total revenue is like 2% to 3%, but the ForEx eat it off for the gross margin side. So does that mean that gross margin impact is 2% to 3%? Is my understanding correct?
2% to 3% on the top line and every 1% increase of NT dollar against U.S. dollar is at about 0.5 percentage point of our gross margin.
So that's about 1% to 1.5% gross margin impact in the fourth quarter.
Now you said that.
And by the way, the ASP increase was quarter at 1%, not 1% to 2%.
Okay, okay, okay. The final quick follow-up is that for management is saying that the CapEx will consider that the ROE or RICs for the shareholders, which is great for the investors. However, can we have like a longer-term capital intensity guidance such as, for example, like 20%, which is a reasonable target? Can we expect that or our CapEx will maintain at lower than the depreciation, which is around like $1.5 billion a year, something like that?
We don't commit something like that. I mean, we really don't see how much money we can afford to spend. We don't look CapEx that way. It's really on what kind of return we can achieve and how much CapEx is needed in order to trigger that kind of project.
And also our President just mentioned, we are looking at opportunities, both organically and inorganically. So it's more complicated for UMC's case compared to the other countries, which probably only relies on mostly on the organic growth.
So we'll look at the combined basis and to see what kind of capacity expansion is the best solution for our customer as well as to our shareholders.
Maybe I can add a couple here. Three years ago, we actually adopted a strategy that, first -- our first priority is reshaping our financial structure, and so our goal is to try to improve our financial structure first.
And then the second strategy was focused on cost-effective capacity expansion. That is a combination of the made and buy and -- which is what we're doing right now. I think we -- at the level that -- we've gone through the first phase, and we feel comfortable with where we're at right now. And we're looking into the second phase, and the ultimate goal is we try to striking a balance between the shareholder interest as well as the growth of the company.
So your answers are legit and -- but the question is, we are looking on all of this on a holistic view and maybe, at the time that mature, and we'll be able to put you, maybe there is a reference in terms of the CapEx budgets or affordability level.
So -- but we're still going through that so-called Phase 1, and we add -- we're reaching probably a late-stage of the Phase 1, and we continue accelerating our second strategy, yes. Hope this helped, too.
Yes, that helps. I think the investor is fully appreciate that the return profile improvement for the last 2, 3 years. I think that one of the major concerns is from an investor, which I got, is that people worry about that UMC might trigger a major massive CapEx for the 28 because if you want to increase your 28 by 10,000 or 20,000 wafer per month, that's by $2 billion, $3 billion. So I mean, that's one-off or one major CapEx hurdle, which is the concern right now. So I want to see whether we have some upper limit or some kind of guidance.
Well, at this point, you don't need to worry about that. And I've seen -- we're having pretty good discipline here to try to manage that. So we're going to stay that way. If there's any change, I'll let you know, but not at this point.
We thank you for all your questions. That concludes today's Q&A session, and I will turn things over to UMC Head of IR for closing remarks.
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. Thank you.
And ladies and gentlemen, that concludes our conference for third quarter 2020. 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 Investors Events section. You may now disconnect. Goodbye.