Citi: UMC price increases and improved AI expansion outlook prompt Citi to raise target price despite earnings forecast cuts

Where is the operational improvement showing?

UMC expects wafer shipments to grow by a low single-digit percentage sequentially in the fourth quarter of 2026, with average selling prices remaining firm. The company expects its blended average selling price to rise about 10% year over year in 2027, driven by an improved pricing environment and a richer product mix.
Management expects pricing to improve starting in the first quarter of 2027, with inflation and rising costs also forming part of negotiations with customers. However, higher material costs and depreciation could limit gross margin expansion.
Citi expects capacity utilization to rise from 88% in 2026 to 90% in 2027, and is optimistic about demand for 22/28-nanometer technologies and opportunities to receive orders transferred from TSMC.

Citi cut its earnings per share forecasts for 2027 and 2028 by 10% and 8%, respectively, citing continued weak consumer demand and long supply-chain lead times that could delay the ramp-up of new capacity.
The company expects depreciation to rise by a high single-digit percentage or more in 2027 and possibly increase further in 2028. Citi therefore cut its 2027 gross margin forecast from 39.3% to 36.1%. Although the bank still expects revenue to grow about 20% year over year in 2027, it forecasts earnings per share to fall about 0.9%.

Management expects AI-related revenue to grow from about 300 million US dollars in 2026 to approximately 25% of the company’s total revenue in 2029. The company previously said AI-related revenue would exceed 1 billion US dollars within three years.
The company plans monthly capacity of approximately 18 thousand wafers for silicon photonics, 22 thousand wafers for silicon capacitors and 20 thousand wafers for modulators. It plans to begin installing equipment at the end of 2028 and reach the planned scale by 2030; the expansion is tied to customer commitments.
Management believes that combining silicon photonics with thin-film lithium niobate modulators and advanced packaging could provide an advantage, and customer interest has extended beyond early partner HyperLight.

Citi maintained its buy rating and raised its target price from 125 New Taiwan dollars to 143 New Taiwan dollars. The bank sees clearer capacity utilization and pricing trends, as well as stronger long-term AI growth potential.
The new target price uses a price-to-earnings multiple of 18 times forecast earnings per share for 2027/2028, compared with the previous multiple of 15 times forecast 2027 earnings. The higher valuation multiple offsets the effect of the earnings forecast cuts.