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To: Ram Seetharaman who wrote (5930)	9/6/1999 3:00:00 PM
From: DJBEINO	Respond to of 9582

* UMC reported 2Q99 EPS of NT$0.30, much better than our estimate of NT$0.12. Today's Date : 08/24/99 The upside came from better gross margin and higher non-operating income. * 2Q99 was the second consecutive quarter of sequential improvement in operating income. We expect more to come. * Our 12-month share price target is NT$90 and our recommendation is 2- Outperform. United Microelectronics Corp. (UMC) reported 2Q99 earnings of NT$0.30 per share, much better than our estimate of NT$0.12 per share. Here are the key points: Revenue totaled NT$7,072 million (US$216 million), up 77% from year-ago period and up 9% from 1Q99. We believe the sequential increase was primarily driven by higher utilization of UMC's fabs (Fabs II and III) and to a lesser extent by price increases that went into effect in the latter part of the quarter. As a result of higher utilization and firm prices, UMC's gross margin in 2Q99 was 31.8% (versus our estimate of 27.0%), up from 2Q98's 27.3% and 1Q99's 22.6%. The better-than-expected gross margin accounted for about 1/3 of the upside to our earnings estimate. Operating expenses totaled NT$1,050 million (versus our NT$1,060 million estimate) or 14.9% of revenue, up slightly from 1Q99's 14.3% but much better than 2Q98's 23.8%. Operating income totaled NT$1,198 million (US$37 million), which represented a significant improvement from 2Q98 (up 740%) and 1Q99 (up 120%). Net non-operating income was NT$801 million (versus our estimate of NT$-110 million), up from 1Q99's NT$407 million. The higher-than-expected non-operating income accounted for about 2/3 of the upside to our earnings estimate. Since details are not yet available, we are not able to determine the sources of UMC's non-operating income. We would venture to guess that a large portion of this non-operating income was due to UMC's equity interest in United Semiconductor Corp. (USC), its first foundry joint venture set up in 1996. We believe USC should have benefited from a combination of better product mix as well as price increases. In our earlier conversation with UMC, we were told that demand for quarter micron (and below) capacity was very strong and that UMC/USC increased prices. We believe since USC is a newer fab than UMC's Fab III, it should have benefited more from the strong demand for 0.25-micron capacity. Net income for the period was NT$1,984 million (US$61 million), up 74% from year-ago period and up 110% from 1Q99 and far higher than our estimate of NT$748 million. Valuation: We are encouraged by the better-than-expected 2Q99 results reported by UMC and believe the company's business is recovering nicely from its 4Q98 bottom. We are raising our full-year estimate for 1999 from NT$0.44 to NT$1.00 to reflect the better-than-expected 2Q99 and a more optimistic outlook for the rest of this year. Our 12-month share price target is NT$90 and our investment recommendation is 2-Outperform. COMPANY DESCRIPTION: UMC is the second largest wafer foundry worldwide. lehman.com