Welcome everyone to UMC's 2020 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time, if you would like to ask a question. For your information, this conference call is now being broadcast 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.

Thank you, and welcome to the UMC's conference call for the fourth quarter of 2020. I'm joined by Mr. Jason Wang, the President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our President's key message to address UMC's focus and the first quarter 2021 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. Chi-Tung Liu, to discuss UMC's fourth quarter 2020 financial results. Chi-Tung Liu: Thank you, Michael. I'd like to go through the Q4 2020 investor conference presentation material, which can be downloaded from our website. Starting on Page 3. Q4 of 2020 consolidated revenue was TWD 45.3 billion, with a gross margin at 23.9%. The net income attributable to the stockholder of the parent was TWD 11.2 billion and earnings per ordinary share was TWD 0.92. Capacity utilization rate in Q4 climbed to 99% compared to 97% in Q3. And if you turn to Page 4, our quarterly comparison financial performance. Revenue increased about 1% after the NT dollar impact reached TWD 45.3 billion. Gross margin 23.9%, or TWD 10.8 billion. Because of some employee-related compensation and also share-based scheme, our operating expenses increased to TWD 6.3 billion in the fourth quarter of 2020. And as a result, operating income is around TWD 5.6 billion, or 12.4%. And because of the strong submarket -- mark-to-market valuation has contributed to most of our non-operating income in Q4 2020, which was TWD 5.6 billion. So our net income in Q4 last year was TWD 10.9 billion and net income attributable to the stockholder of the parent is TWD 11.2 billion. EPS is TWD 0.92. On Page 5, which is the year-over-year comparison, our revenue grew 19.3% in NT dollars to TWD 176.8 billion. In U.S. dollars, the growth rate was roughly around 26%. And among the growth, around half is contribute by the combination of our USJC in Japan. And gross margin grew to almost 8 percentage points to 22.1%, or TWD 38.99 billion.

Thank you, Chi-Tung. Good evening, everyone. Here I would like to update the fourth quarter operating result of UMC. Our business traction in Q3 carried us over into Q4 lifting utilization rate to 99% and rising wafer shipment to 2.3 million 8-inch equivalents. The stable capacity utilization was driven by robust end market demand on consumer and computing-related applications, such as Wi-Fi, digital TV, microcontroller, and power management IC.

Yes. Thank you, Mr. Wang. Now ladies and gentlemen, we will now begin our question-and-answer session. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Okay. Yes. Thank you. Good afternoon and a good result. I want to test the first question on the shipment and ASP outlook. First on shipments with utilization now at 99%, can you discuss how much growth -- additional shipment growth you can squeeze out this year from your capacity? So if you could give a sense on how much capacity additions through the year you'll have on 12-inch and 8-inch?

All right. So the first thank you. And for the guidance of Q1, we project the wafer shipment will increase slightly and primarily due to higher utilization rates, driven by the strong demand that we reported earlier. We're already at 99%, but we project Q1 will be 100%. So the other -- the ASP…

Okay. And maybe just a follow-up first on that. I guess, the follow-up through the year since you'll be at 100%. Could you discuss the capacity additions? Like -- because I know you had Xiamen coming on. So when the additional capacity will be available, if you could discuss on 12-inch and then debottlenecking mature nodes? How some of these fabs may ramp to add capacity through the year?

Well, from a year-over-year standpoint, the 2021 capacity will grow about 3% in 2021.

Okay. Yes.

And that will split between the 8-inch and 12-inch. The 8-inch due to the limited clean room space. And we're only doing the some of optimization and productivity improvement, so that will probably be about 1% increase on 8-inch and the 12% -- about 5% from 12-inch.

Okay. Actually, a follow-up and then I'll get to ASP. On the 8-inch where there's very limited space, there was discussion a few months ago about purchasing 8-inch capacity from Japan. Could you discuss, I guess, opportunity to acquire capacity or otherwise your view to grow the customer base on 8-inch. Is your plan to eventually find a way to add capacity, or is it to transition customers into 12-inch?

Well, I mean, that -- well, first of all, from the 8-inch greenfield from our existing premium space, there is a limitation there, okay? And as far as the -- inorganically, we are unable to comment any guess or speculation, but we are always open to exploring new opportunities as long as they can enhance our shareholders' benefit. So we are open to the inorganic approach. The comment -- your question about if we can migrate in the 8-inch into 12-inch? That is ongoing efforts. It's subject to different applications. And the customers' alignment and that will be an ongoing effort for us.

Okay. Great. And then, I guess, now for the question on pricing. Could you discuss for blended ASP, you'll have two moves like 28-nanometer ramping, but also I'm curious for additional pricing action how you expect over the next few quarters ongoing ASP trend if you could discuss that?

Well, the Q1 -- first of all, the Q1 ASP guidance was a result of increase due to higher 28-nanometer wafer shipments. And some of the pricing enhancing in the 8-inch as well, the technology migration in the 12-inch business, we're migrating some of the product into a different -- the next node. The overall blended ASP will increase about 2% to 3% quarter-over-quarter in Q1 in our guidance. For the ASP, we always keep commitment to our long-term customer. So, however, we do believe the ASP should reflect our market value based on the technologies competitiveness as far as our manufacturing excellence, along with our commitment to our customers.

Okay. Great. That's helpful. And just one final question. The earnings with some of the non-operating income at TWD 2.42, how would that translate? Because your payout has always been a target to be a high percent, but the earnings grew quite a bit. So if there's a framework to think about payout of the higher earnings you generated? Chi-Tung Liu: We, of course, will continue high payout dividend policy. And I think for the cash dividend, we do see the potential for the 2021 payout to be likely double from last year. But this is also subject to the Board approval.

Okay, great. Thanks for your time, Jason.

And the next question is coming from Sunny Lin, UBS. Go ahead, please.

Hi, thank you for taking my question. Congrats on the very good results. Number one, for your CapEx, it's quite a bit above the level in the last few years. So I wonder, under the 5% expansion for your 12-inch, what specifically 28 is going to expand for this year?

In 2021, 28-nanometer capacity will increase by 20% year-over-year.

Got it. So that's a bit above what you guided before, I think, previously, you were guiding for -- from 40,000 wafer per month to about I think 52,000 wafer per month by mid of this year?

The 28-nanometers total capacity -- combining the high-K poly-SiON, we have about 45,600 per month at the end of Q4 in 2020, and we are projecting by end of 2021, Q4 2021 will be 59,300 per month. Chi-Tung Liu: Yes. Some of the new 28-nanometer capacity also comes from the transition of 14-nanometer capacity. So may not be all greenfield.

Got it. So a very quick follow-up. How does this changes your expectation on depreciation for this year and next year? Chi-Tung Liu: The depreciation curve still will be trending down, as we mentioned before. Of course, the slightly higher CapEx in 2021, we are, of course, after the depreciation curve for the next few years, but not that much. So we still expect to see about 5% decline year-over-year in depreciation for 2021. And the decline rate should be more in 2022 followed by an even more significant decline in 2023, but let's focus on 2021 and 2022 first.

Got it. Thank you. And my second question is on mature 12-inch. So it looks like mature 12-inch foundry's are also seeing pretty strong supply/demand from late last year. So following our -- some of the price negotiation on eight-inch, should we also expect some price hike for 12-inch in following few quarters?

Well, the earlier quarter ASP projection for the year is the blended ASP reflects, the combination of eight-inch and 12-inch price in a eight-inch equivalent. So that will be a good reference for you to use.

Got it. Thank you. Very helpful.

And next we have Roland Shu of Citigroup for questions. Go ahead please.

Hi, good afternoon, and congrats for the good result. First question, you said, your first quarter capacity is loaded under 100% utilization. So is this 100% across the board for all -- not all. I think that my question specifically is about 28 and 40-nanometer. So compared to your average 100% utilization, how about the capacity on 28 and 40-nanometer doing in first quarter?

Well, the overall is 100%. And both the eight-inch and 12-inch are full at 100%. So the most of nodes are full.

Yes. Most nodes are full, how about the 28 and 40?

They both are full.

Okay. Both are full. Okay, yes. And second question is for your gross margin. So your revenue last year already achieved a record high. Are there still room for gross margin to reach our last peak label around 30% in 2010. So, how do we expect your margins in the -- maybe next one to two years? How soon will the gross margin go back to 30%? Thanks. Chi-Tung Liu: Yes. We, kind of, maybe I can answer first. Basically every 1% increase in ASP will contribute more than 0.5% gross margin. So it really depends on how much ASP increase. Also NT dollar appreciation also has some negative impact on our gross margin. So every 1% of NT dollar appreciation will eat about 0.4% of our gross margins. We also ensure the benefit of economic scale and also better product mix and cost reduction. More importantly, it will be our performance for both our 12M Japanese subsidiary as well as our Xiamen subsidiaries. Currently, our Xiamen subsidiary still post operating loss, given the early stage heavy depreciations, but their performance has been continuing to improve because of the higher loading and also higher 28-nanometer production. So that will contribute a certain percentage of gross margin increase.

Understood. Yes. So how do you see on the ASP increase? Are we able to have this 10% ASP increase in the near future?

Well, I commented earlier, the ASP has manufactured, they have to be considered. So along with all those considerations and we're expecting our ASP will reflect our market value based on our current market position. And that's what we're continuously driving for.

Yes.

Just like Chi-Tung mentioned earlier, continuing to improve our corporate earnings is our principle. So as we continue improving productivity, driving costs down, enhancing product mix as well as moving the ASP to a reasonable market reflecting our market value. And at the same time, we are managing our depreciation curve. That means the UMC will act on to our plan to improve our overall corporate earnings.

Okay. Thanks. It's clear. These were all of my questions. Thank you.

Thank you.

And the next question is coming from Bruce Lu of Goldman Sachs. Go ahead, please.

Hi. Thank you for taking my question. Great results. I want to ask about the profitability for the 8-inch and 12-inch -- especially legacy 12-inch, okay. Thus removed 28-nanometers out of the equation because the depreciation is still underway. So what is the price gap between the industry leader for 8-inch and legacy 12-inch for UMC? I mean, do we see the reasonable cost gap between you and the industry leader? So what is the optimal profitability for the 8-inch and the legacy 12-inch?

Well, I mean, that's an interesting question. In general, we do believe there is a potential in terms of our market price, okay? Again, the ASP result of many different factors I mentioned earlier. So we have to actually -- first executing our technology manufacturing. And while maintaining our commitment with our customer so -- and eventually, we can try to win-win results for both our customers and UMC. So the bottom line is we need to be a trustworthy partner for our customers while we're managing our ASP to a reasonable level. I can't really quote you a percentage specifically, but I do believe there is a potential to get to that.

Let me ask a question in a different way. I mean, when the company tried to do that -- list IPO in China, you did provide your urgent profitability, which is for like mid-30s percentage in terms of the gross margin. So comparing to TSMC for the 8-inch, which is around 50%. So the profitability gap is about 15%, which may mean by reasonably assume that the price gap or some kind of cost gap, right? I mean, given the current situation or given your execution has been improved the cost structure hasn't improved. So what is the reason? Can we assume that you can achieve 50% sometime in two, three years, or that is a way too high bar to achieve?

Well, I can tell you this, on the 8-inch operation, we are very close to where our market value is. Okay. And -- but again, the blended ASP including a product mix as well. So the -- some of the product migration will have to take effect to reflect the gap. And from those applications, we may already have is in commitment, so that will take some time to manage that migration. But if you're talking about from apple-to-apples standpoint, our 8-inch ASP is very close to what the market value is.

Wow. So how about legacy 12-inch?

The legacy 12-inch also again is resolving on current product mix. So one of the product mix improvement is included an important area for us to continue to enhance. So, if we do the apple-to-apple comparison, I do think the -- from the 12-inch potential there is -- on the 12-inch mature, there's still some potential there.

I see. So from investments perspective, we can reasonably assume that the profitability for 8-inch will remain at high level, but we can expect some positive improvement from the legacy 12-inch?

That will be our goal yes.

Thank you. The next question is regarding your CapEx. I mean in addition to the 28-nanometer capacity expansion that you guided do you have any plan to expand like legacy 12-inch? I mean based on the current wafer pricing, is it profitable or margin accretive to increase the capacity for the legacy 12-inch?

The economics on the legacy 12-inch at this point it remained very challenging, okay? So the part of our 2021 CapEx that we invest we including for some of the specialty capability -- capacity capability within the legacy side. I think those has a justifiable economics. But if you're talking about a greenfield logic capacity for the mature 12-inch I think the bar is very high remain very challenging to make economic sense there.

Thank you. I think I want to squeeze one last question which is R&D expenses, okay? For 2020 the R&D expense is still like 7.5%. So what is the target for 2021 and maybe 2022? And the absolute R&D expenses actually went up in 2020 versus 2019. I mean after like giving -- after stopping the best R&D for the best node. So can you provide me more color about these R&D expenses increase other than the higher employee bonus?

That's a very good question. I mean let me see, if I can answer it this way. It's our belief and our goal we won't strive to become a leading pure play foundry in some particular applications with one comprehensive process solution, okay, and manufacturing excellence and sizable capacity offering in both 12-inch and 8-inch fabs and along with our strong client portfolio. We think with that we can actually help UMC to become an important player in this industry. The foundry capacity has been tight for some time as we all know. The tightness in capacity availability is more pronounced in 8-inch advanced and 12-inch mature. And demand from those nodes significantly outpaced the growth in capacity, okay? And we believe the supply and demand imbalance could likely lead to a structural shift in semi market dynamics. So for UMC this our technology know that we need to continue to focus. And therefore UMC has become more relevant to the market and trustworthy to our customers as I said. In addition, we need to commit and we are committed to strategically allocate meaningful among R&D into the R&D investment to sustain the technology leadership in our focused in particular applications. Areas such like high voltage those are new. RF SOI, PMIC ultra-low power embedded on flash memories, those are all important and that require us to remain committed in R&D development. So that will give you some idea why we're looking at that as a continuous effort.

So can I say that those investment will be the key for you to improve your legacy 12-inch profitability?

Yes you can say that. Not only the probability also the continued stable high utilization rate.

Understand. So what is the -- for the modeling purpose can you provide some target as for R&D expenses as a percentage of revenue in 2021? Chi-Tung Liu: Yes. I think for 2021 even beyond our goal is really to keep the OpEx as a similar percentage as the last few years. And same for R&D. Hopefully our revenue growth will provide more resources to all the related operating expenses items.

Okay. Thank you.

The next question is coming from Stephen Chan, Asia Capital . Go ahead please.

Hi, good afternoon and thank you for taking my question. A couple of questions here. And the first one is actually still on 200-millimeter. I think one of the other foundry supplier mentioned about to acquire or to build a 200-millimeter capacity from greenfield actually the cost increased by probably another 50% in the past two to three years. So I was just wondering in your thoughts what kind of 8-inch or 200-millimeter ASP will be just -- can justify, if you are going to acquire a new fab or to start from the greenfield? Chi-Tung Liu: This is really hypothetical so it's difficult for us to answer the hypothetical questions. So let me answer you in a different way. We see potential to bring value to our current customers, as well as our shareholders. If we acquire a similar fab like we did for USJC. So that has been bringing value to our customers as well as to our shareholders. So that has been our benchmark. For the future acquisition, if there's any we will pretty much follow a similar guidance. So the question you raised is really too many factors. For us, I think the ultimate baseline is to see, if they can bring value to our shareholders and customers.

Okay. Fair enough. Another question is so in Q4 your 28-nanometer revenue was already 18%. So, do you have any goal or if there's any that ballpark number in this year that you think we can – can provide us as a reference?

Well, the – in Q1, we foresee the 28-nanometer contribution will continue to grow. And the – well, if you're talking about the target, our goal is we believe the 25% contribution is achievable after our new 28-nanometer capacity come online. So we still align that as our current objective.

Yes. Thank you. That's very helpful. The last question from me is back to 200-millimeter. So we know, it is a very busy capacity right now. So I'm just wondering, as of this moment, do you still have the luxury or do you still leverage the chance to continue to optimize your product portfolio within 200-millimeter, and if we look at it on a structural basis, let's see in the next one, two years, how do you think this will alter your 200-millimeter ASP as well as the profitability?

Well, again, that's the ongoing efforts and the – along with the productivity improvement and the product mix enhancement. I think that that will be the continuing effort for us to improve our 8-inch results and performance. The current 8-inch capacity within UMC is mainly due to the limited clean room availability. So that's why we focus on productivity improvement, and some of the debottlenecking efforts. And we also talked about earlier that we are always open to explore viable option in the 8-inch space as well. So those –we'll continue seeking those opportunities. Given the current market strong market demand, I think the inorganic approach is less possible. So we have to concentrate and draw our attention to our internal effort first.

Understood. Thank you very much. That's very helpful. Very good results. Thank you.

Thank you.

And the next one is from Szeho Ng of China Renaissance. Go ahead, please.

Hi, gentlemen. Congratulations. My first question regarding on digitization, now if the company are running at 100% utilization, I just wonder, how much we can overdrive our capacity? So what is the theoretical peak utilization we can achieve?

Well, we – for the 2021, we see a very robust demand outlook in 2021. It's driven by multiple factors in the smartphone-related demand, the continued momentum the work-from-home trends. And in addition a very hot topic recently, there is a strong pickup in automotive segment too, right? So we believe the demand remained very strong. The strong demand from those applications obviously will lead to higher utilization rates. And so, I think we have a pretty good confidence that we will maintaining the high-loading situation. But besides demand, we still need to continue to focus on our manufacturing excellence, as well as our solutions in order to continue managing the pipeline of both 12-inch and 8-inch and those will help us for the long-term loading stability. So far, we've been executing according to plan and we're making good progress. We have delivered in 2020 and we still remain very high confidence in our 2021 loading outlook.

Okay. Great. And for this year's capacity expansion can you share with us how fast you will be ramping up the capacity every quarter?

There will be some increase in the second quarter and then there will be some increase in the fourth quarter. And – but in general the overall percentage of target increase is about 5% year-over-year.

Okay. Great. Thank you. And last one, I think for Qi Dong. How should we model the tax rate for the company this year? Because last year, the cash flow actually capped low. So I'm not sure if that's kind of sustainable? Chi-Tung Liu: I think we probably – it will be safe to model about 10% corporate tax rate for 2021.

Okay. Great. Okay. Thanks very much. congratulations. Chi-Tung Liu: Thank you.

The next question is coming from Sebastian Hou, CLSA. Go ahead please.

Thank you for taking my questions. So first question is, I think there's a lot of talks recently about the oval chip shortage, which has affected the global car production and hence also media reported many governments have approached Taiwan government and TSMC specifically mentioned for causing such shortage, but we don't see much mention about UMC. But we know that UMC also have some exposure here. So curious about -- if you can elaborate, what's the company's exposure to automotive here, particularly for those power management microcontrol unit chips that are severely in shortage right now, and also whether you are seeing a similar situation i.e. the shortage issues with your major IDM customers here? Thank you.

Well I mean we reported last quarter, we see a recovery of the automotive market space. And so we definitely see the auto recovery from end of last year and the momentum has continued. However, the overall utilization rate is -- of the fab are very high for the past three quarters, four quarters already. So despite the fact that UMC's fab has been operating at 100% utilization rate, we are aware of the inquiry from the automotive market and starting from Q4 last year and we are aware of our position in the auto supply chain as well. And our current plan with that area is we're trying our best effort to help the chip shortage within that supply chain. And we have been doing that starting from the beginning of this year yes.

Okay. So what you said is that you were trying to allocate more capacity or expand capacity to mitigate the shortage impact for automotive customers specifically?

Yes, it's hard to increase the capacity. It's more of reprioritize. So prioritizing the automotive market with a bit of a better priority. So -- and so hopefully we can release some of the pressures.

Okay. So does that imply that nonauto-related applications and customers, if they have not given you long and big enough forecast for the following quarters and they are likely to -- their allocation will likely to be get reduced?

Well I won't say that because some of the capacity increase is coming out from the productivity improvement. And so for those, the priority will probably be allocating to automotive at the current time. And -- but again, automotive recovery really came late in this whole demand search. So we -- it's more of an optimization approach now. And hopefully by giving some of the higher priority support, we can release the market pressure a little bit. As you know the overall loading situation is severely high. And so we can only do as much as we can at this point. Chi-Tung Liu: So our commitment to all the nonauto customer will not change at all.

Okay. Okay. And given that the company has offered some colors about the 8-inch capacity will increase by 1%? Also there is a challenge to increase legacy 12-inch capacity which I assume that most of the auto chips are using these nodes. It seems like if you're not cutting or lowering the priority -- cutting or lowering your commitment to the nonauto customers, I just cannot imagine, how to mitigate the -- how much more extra capacity we can allocate to the auto guys? Chi-Tung Liu: Just as I just mentioned, we will have our own way to managing the priority while keeping the commitment to other customers. So basically, we are doing our best to mitigate the situation.

Okay. Great. And a follow on that is that given the auto I think we have already adjust our wafer prices and now closer to the market prices on each side. And whether or not this auto chip shortage and auto guys that come later could be an extra catalyst or factor to enable to come in to raise price or adjust price higher not just for the auto guys, but to the nonauto guys also?

Yes. The upside and the incremental support will be limited. And so, I will say that it's not going to be any significant uptick on that.

Okay. Great. Is there a number -- or is there a number you can give to us or the range of the numbers you can give to us about your automotive revenue exposure as a company in total?

No. Right now we don't guide any automotive contribution in – the revenue contribution at this time. And we only covered the three – under the three Cs.

Okay. Okay. That's fair. The last question for me. I think the – I think you did probably explained this in the prepared remarks but I dialed-in later. So I didn't – so allow me to ask again. So what's driving the non-operating investment gain for the past quarter? Thank you. Chi-Tung Liu: So for Q4, the net investment cap TWD5.7 billion was mainly correlated to the upward momentum in the equity market. So mostly non-cash-based mark-to-market valuation gain.

Okay. Of all this equity holding you have? Chi-Tung Liu: Yes.

Okay. Thank you.

Yes.

The next question is coming from Rick Hsu, Daiwa Securities. Go ahead, please.

Hi. Good evening, guys and congratulations for your strong results. I just got one question for my modeling purpose. How much government subsidies do you expect to receive throughout the whole year? And how much longer would that sustain? Chi-Tung Liu: It should be similar to that of 2020. And the continued subsidy recognition should continue all the way to maybe 2023.

Okay. All right. Thank you so much. That’s all I have. Thanks.

And next we'll have Charlie Chan from Morgan Stanley for questions. Go ahead, please.

Thanks for taking my question. Hi, good afternoon, gentlemen. So first of all we have a lot of discussion about the supply debottleneck. You try to reprioritize auto to production. Can you give us a kind of time line? How soon this could be resolved? And I guess, is there any way to judge how real is the demand? Because due to shortage customers tend to double book. So can you give us some insights about these questions?

Are you referring to the automotive market, or it's just... Chi-Tung Liu: Yes. Just – we probably won't be able to give you auto segment but we can give you an overall.

Yes. So the overall market the – at this time the pace of the demand growth has surpassed the rail capacity increase as we all know. However, we do look at the – on the inventory side we do see a decline in semi inventory in the past two quarters. Portray a healthy inventory level as we – we think across the supply chain. So the demand continued to be strong in both 8- and 12-inch and we have confidence in that. And we're constantly checking that at this time. We believe this is some of the changes taking place in the supply and demand dynamics and again, this could lead to a more of a structural shift in the foundry industry. There may be a possibility of that right now. Yes.

Okay. Thanks. And maybe some intelligence from supply side, right? I mean PSMC, the power chip are they – can they add additional 20,000 of the 8-inch capacity in their fab right? So why they can do so and you cannot? And also you have some operation in China, right, the Xiamen fab and the HeJian fab. So how do you see the Chinese peers plan for that supply increase and long-term or that is going to resulting in oversupply?

Well, first of all, I mean we are not in a position to comment on our peers. And we can only focus on what we do. For UMC, the – we have a very limited space, clean room space in an 8-inch area. So what we're doing now is we deploy – we're taking our CapEx and taking advantage of the available clean room space for our 12A and 12X fab. And – but those two facilities, our objective now is to increase capacity to accommodate a growing 28-nanometer wafer demand. And that's why you heard earlier, we're talking about – we will focus on 28-nanometer capacity increase in both the – in 2021. And that's where we're going to be putting our capacity at.

Okay. So it is more like a clean room issue and you want to prioritize 28-nanometer? Is not because you cannot acquire 8-inch equipments?

Well, first of all yes, the clean room is limited, right. I mean from a greenfield standpoint. We -- it doesn't make sense for us to acquire tools if we don't have a place to put them. Yes.

Okay. Yes. And also you mentioned that you try to convert some 8-inch product to 12-inch another approach to increase the supply. Can you share with us what kind of the semiconductor products you're going to see a massive migration from 8-inch to 12-inch in the coming two years?

Well, they are different applications spread out in the different segments. So, for example, we see the overall solution the covering on both 8-inch and 12-inch and we see the RF SOI application migrating from the 8-inch to 12-inch. So, they are various applications they continue doing that. But we also see a continued pipeline going into the 8-inch as well. So, this is the -- we just have to continue managing the pipeline the product pipeline from both 12- and 8-inch.

Yes. Okay, that's very helpful. And that's the maybe question to Chi-Tung. Can you give us kind of full year gross margin guidance? Sorry if I missed it. And also the lawsuit with Micron. I know you already settle with the U.S. justice department right? But how about those who's Micron and are you going to settle with the counter parts? Thank you. Chi-Tung Liu: We don't have full year guidance for gross margin. We do have one quarter -- first quarter gross margin guidance which is in mid-20s. So, hopefully, we will take it from there. For the lawsuit, we don't have any comments. If there's any significant development, we will disclose them accordingly in a timely manner.

But may I assume that the gross margin can gradually improve from here because the FX impact -- sorry I'm not sure about FX impact kind of a one quarter impact or assuming that the FX rate is the same for 2Q, would that negative impact on gross margin carry into 2Q? And also the depreciation trend, can you kind of comment on the core return of depreciation FX impact and also the positive impact from the -- your wafer pricing? So, we can kind of get a sense about the full year gross margin trend. Thank you. Chi-Tung Liu: The depreciation will go up/down quarter-over-quarter. As I mentioned earlier this year we expect the full year depreciation to decline by roughly 5% and I think a little bit more. So, the gross margin guidance again unfortunately I don't have the crystal ball for the currency. So, we can only give the current situation for first quarter which is again mid-20s.

Okay. Thank you. Super helpful.

Ladies and gentlemen, we're running out of time. So, we'll take the last one. And the last question is coming from Randy Abrams, Credit Suisse. Go ahead please

Okay. Thanks for fitting me at the end. I have a few follow-ups. First on the CapEx where before you were at TWD1 billion and under spending. And I think part of that your 28 wasn't full. With the move to TWD1.5 billion, should we expect that a new range like you're growing mid-single-digit with about TWD1.5 billion spend. So, is that the framework to go on or do you even see a scenario that -- with the focus on 28, it could even start to push a bit higher?

Well, Randy, the first comment I have is our stated ROI-driven CapEx strategy that did not change. So, we'll continue following that principle. So, despite the needs the upside in customers demand and forecast even with the 28-nanometers, the market situation is not the only consideration that's into our 2021 CapEx budget. Our plan right now is I want to focus on maintaining UMC's market relevance and increase the customer stickiness and base our value proposition, our solutions, and the manufacturing and as well as the critical mass on our capacity offering. So, this strategy and the principle it requires to follow a rigorous evaluation process right? So, we continue doing that, okay? And -- so we have quite a bit of boundary to do that to make sure that we deploy the right amount of the CapEx. At this time, it's a TWD1.5 billion and for the upcoming next year, we will provide that guidance when we're ready.

Okay, great. If I could ask on the SMIC, it looked like there were a lot of fears three, six months back of restriction of U.S. tools. And now with the latest, they may get access to mature tools. I'm curious from a market dynamic, did you see any accelerated kind of diversification efforts. And have those efforts slowed down or reversed?

Well, I mean, first of all, prior to the -- any of the export restriction, the wafer demand was already very strong. The demand situation was remained strong, as we have commented, this will last throughout the entire 2021 and driven by many of the momentum. So I haven't seen much of a change from that. And even with what the media or any speculation in terms of the approval in the legacy, we can't comment on the competitors for any media speculation. But -- is the way we see it, is we believe the semi demand now has surpassed the supply. And it's -- in our view this is not related to any development of export restriction at all. And so, I think, our competitiveness advantage is going to be on our own capability. And it's not going to be on any top -- on the geopolitical or trade dynamics. Yes.

Okay. And one other question. I think, a quarter ago there was still some underutilization in the Japan fab and also from a little bit lower CIS. Has that loading now picked back up, or is there opportunity to get some of the automotive customers for that fab, if it's not quite full?

You have very good memory. Yes. Yes. The -- our last call, we actually talked about that. We stated the 90-nanometer will be a trough and the business will start to recover during the first half of this year. And we are seeing that. And the production rate on some of the wireless communication product will increase our 90-nanometer's contribution. And this ramp will start towards the end of the Q1 and beginning in Q2. So it's our expectation by Q2 and will be fully low down this node.

Okay. And one last, just a couple of housekeeping. The non-controlling interest has been moving around, but the expectation on that where it's probably the Xiamen JV partner. And if you could also clarify on OpEx, I think, to Bruce's question, would OpEx grow with sales or OpEx would be kind of stable in absolute dollars? I just want to clarify the OpEx rate. Chi-Tung Liu: We certainly want to keep it within 13% to 14% of revenue range.

Okay. And then for the non-controlling interest, is there a way to think how that would trend? If you get closer to breakeven, that minority interest would come down? Chi-Tung Liu: That's right. That's correct.

Okay. Great. Okay. No, thanks. That’s all my questions. And good job and good luck, guys.

Thanks. Chi-Tung Liu: Thanks.

We thank you for all your questions. That concludes today's Q&A session. I'll turn things over to UMC Head of IR for closing remarks.

Thank you, everyone, for dialing in 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, Mr. Lin. And ladies and gentlemen, that concludes our conference for fourth quarter 2020. 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.