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UBS is upgrading Taiwanese foundry United Microelectronics from “neutral” to “buy.” The Swiss investment bank raised its price target on the stock from 37 Taiwan dollars ($1.20) to NT$75, representing a potential upside of nearly 50% from its closing price on Wednesday. “We expect UMC to benefit from more steady trailing-edge foundry pricing, supported by second tier foundry makers’ lower break-even utilization, disciplined industry competition and [ Taiwan Semiconductor Manufacturing Company ]’s firm pricing strategy,” UBS’ analysts, led by Sunny Lin, wrote in a note on April 17. TSMC is the world’s largest contract chipmaker and is a rival to UMC, manufacturing integrated circuit wafers for fabless companies. UMC counts Qualcomm , Advanced Micro Devices , Infineon and MediaTek among its key customers. UBS said it expects the chipmaker will be a “major beneficiary” of stable foundry prices into 2024. That would improve gross margins and overall profitability, according to the bank. UBS forecast gross margins will hit 38.1% in 2024, above the average of 17.2% between 2018 and 2020. On top of that, the bank expects return on equity — a measure of a company’s return on net assets and a commonly used profitability metric — will rise to 19.1% from an average of 7.1% in the same period. Because of that, the bank is raising its 2023 and 2024 earnings estimates for UMC by 13% and 36%, respectively. ‘Undemanding’ valuation Shares in United Microelectronics are up more than 20% this year, but according to UBS, the stock is still trading at an “undemanding” valuation. UMC’s year-to-date rerating reflects the “increasing optimism” about the semiconductor industry’s recovery and the greater profitability of the stock, the analysts said. They added that UMC’s current valuation “likely does not factor in” pricing and margin upsides and presents a “meaningful discount” to the higher range of its trading band in the last semiconductor upcycle of 2021 to early 2022. The analysts also highlighted several “upside risks” that the bank has yet to factor in, such as potentially higher orders from key client Novatek Microelectronics and a larger order book, thanks to geopolitical conditions. UBS isn’t the only bull UBS isn’t the only bank bullish on United Microelectronics. It’s also one of Credit Suisse ‘s top tech picks. Credit Suisse said it’s expecting a weaker outlook for UMC, but would “use opportunities to add positions as markets price through the 1H2023 trough.” In a note on April 19, the bank maintained its “outperform” rating on the stock and raised its price target on the stock to NT$60. It noted that UMC’s share price has corrected well ahead of earnings and said margins should “trough higher” in the current downcycle. Meanwhile, UMC’s net cash per share is rising with improved profitability, the bank added. “We see potential for the multiple to rebound further as visibility into higher trough earnings and a recovery improves through the 1H23 correction,” Credit Suisse’s analysts, led by Randy Abrams, said. — CNBC’s Michael Bloom contributed to this report.
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