Unimicron’s ABF gross margin expands faster than expected, while BT capacity conversion slows near-term recovery

Where did third-quarter results differ from expectations?

Revenue in the third quarter of 2026 was 52.65 billion New Taiwan dollars, up 23% quarter on quarter, with ABF sales rising approximately 30% quarter on quarter. Overall gross margin was 28.8%, up 4 percentage points quarter on quarter.
Gross margin exceeded Citi’s forecast and the market consensus by 0.4 and 1.0 percentage points, respectively, but fell short of some investors’ expectations of around 30%. Citi believes the gap reflected slower gross margin improvement in the BT and HDI businesses, while ABF gross margin expanded significantly faster than expected.
Operating profit was 10.528 billion New Taiwan dollars, up 58% quarter on quarter and 6% and 7% above Citi’s forecast and the market consensus, respectively. Net profit for the same period was 10.052 billion New Taiwan dollars, down 23% quarter on quarter.

Citi expects major AI chips to enter mass production around the same time, continuing to drive ABF demand and lifting the company’s total revenue by 11% quarter on quarter in the fourth quarter of 2026. The bank also expects potential price increases of 10%–15% for ABF products during the quarter.
Citi expects overall gross margin to rise to 32.2% in the fourth quarter, up 3.4 percentage points quarter on quarter: improvement in ABF will outweigh the adverse effects of approved salary increases and restricted stock. The operating expense ratio is expected to rise by 0.2 percentage points quarter on quarter due to year-end employee profit sharing.
On capacity, phase three of the first KF plant began production in the third quarter. Management said phase one of the second KF plant is scheduled to begin production in the second quarter of 2027.

The company is converting BT capacity to ABF. Citi believes the conversion will help it capture demand sooner as customers wait for newly built ABF capacity to come online over the next few years.
Some BT capacity is idle during the conversion. Citi expects the adverse impact to last through the first half of 2027 and is therefore less positive about the near-term recovery of the company’s BT gross margin than about that of other BT peers.
Over the long term, the company plans to concentrate HDI resources on AI servers and optical module products. It is cautious about expanding HDI capacity because of intense competition from Chinese peers, and is also reducing traditional PCB capacity.

Citi believes ABF gross margin expansion will help the company reach its long-term gross margin target of 50%–60% for the business sooner. BT and HDI margins also have room to improve once BT capacity conversion is complete and AI PCB product volumes increase.
Citi raised its earnings-per-share forecasts for 2026, 2027 and 2028 by 10%, 5% and 5%, respectively, to 25.00, 51.32 and 96.51 New Taiwan dollars. Its model forecasts overall gross margin rising from 26.9% in 2026 to 40.4% in 2027.
Citi maintained its Buy rating and raised its discounted-cash-flow-based target price from 1,500 to 1,550 New Taiwan dollars, equivalent to 30 times forecast earnings per share for 2027. The bank said weaker HDI performance, a significant increase in industry ABF supply, and higher-than-expected depreciation pressure from capacity expansion could all affect its assessment.