From the transcript (TSMC 2Q26 earnings call, CFO Wendell Huang): “HPC increased 20% quarter over quarter to account for 66% of our second-quarter revenue.”

Insightology View:

The gross margin story is better than it looks

In this piece we want to spend extra time on gross margin, because that is where the market disagrees the most.

The 2Q margin beat wasn’t just about cost improvements and higher utilization. There was a demand component too: N3 capacity is extremely tight, and some customers paid rush order fees, lifting N3 average selling prices meaningfully from the prior quarter.

Looking ahead, the 3Q guide slips only slightly from last quarter despite 3 to 4 percentage points of dilution from the N2 ramp. That is early validation of our view that this capex upcycle will not send gross margins off a cliff.

Based on our research, TSMC is negotiating a broad foundry price increase with customers for 2027 (we estimate 10% to 15%), which should offset the margin dilution from the N2 ramp and the overseas fabs. Management’s Q&A remarks line up with this: C.C. Wei said he is “really jealous” of memory makers’ gross margins, but TSMC will not suddenly raise prices by 4x or 5x. The goal is to keep margins in a range that sustains long term expansion for both TSMC and its customers.

From the transcript (CFO Wendell Huang): “We have just guided our third quarter gross margin to decrease by 1.7 percentage point to 66% at the midpoint, primarily as we expect the steep ramp-up of our 2-nanometer technology to dilute our gross margin by about 3 to 4 percentage points.”

From the transcript (Chairman & CEO C.C. Wei, Q&A): “So we don’t suddenly increase our price by which I like to have 4x or 5x. […] we earn our value and we make sure that our profit, our gross margin is enough for our long-term sustaining expansion. […] So yes, I’m really jealous about memory company’s 86% gross margin.”

The bigger picture: this capex cycle looks longer than any before it

Management upgraded its language on the next three years of capex, from “significantly higher” than the past three years to “even more significantly higher.” The reasons: customers keep pushing for faster capacity expansion, and equipment makers are raising prices to pass through higher input costs.

From the transcript (CFO Wendell Huang, Q&A): “Last time, we said our CapEx in the next three years will be significantly higher than the CapEx in the past three years. Now the CapEx in the next three years will be even more significantly higher than the past three years.”

Put differently: once A14 (risk production in 2027, volume production in 2028, with transistor density roughly 20% above N2; A13 and the backside power A12 follow in 2029) enters its ramp over 2028 to 2030, capex should at minimum plateau at a high level. This upcycle could run longer than any previous one, putting fab construction and leading edge equipment suppliers on an unprecedented long runway.

Construction is already accelerating. Arizona Fab21 P3, Hsinchu Fab20 P3, and Kaohsiung Fab22 P4 have all been pulled forward to break ground in the second half of 2026. Capacity reshuffling is speeding up as well: existing N5 lines are gradually converting to N3, part of Fab14’s 12 inch mature capacity is being repurposed for silicon interposers to support advanced packaging, and mature nodes are gradually exiting the general purpose logic market, with the unserved demand spilling over to UMC and Vanguard (VIS).

ASML: Beat and Raise, Plus One Number That Disappeared

ASML’s July 15 call was a textbook beat and raise: Q2 revenue of €9.33 billion and gross margin of 54.0%, both ahead of guidance, with net income of €2.92 billion. EUV system sales reached €3.8 billion, including one High NA system (ASML press release). Q3 guidance jumps straight to €11 to €12 billion. Full year 2026 revenue guidance was raised sharply, from €36 to €40 billion previously to €43 to €45 billion, and full year gross margin guidance from 51% to 53% up to 54% to 56%. By segment: EUV sales are expected to grow more than 45% this year (roughly 65 Low NA systems shipped), memory related system sales more than 75%, and advanced logic more than 25% (official transcript).

From the transcript (CFO Roger Dassen): “We now expect to ship around 65 Low NA EUV systems this year, resulting in year-over-year EUV net system sales growth of over 45 percent.”

From the transcript (CEO Christophe Fouquet): “As a result, we anticipate our Memory-related net system sales to grow by over 75 percent this year.”“We now expect advanced Logic foundry-related net system sales to grow over 25 percent this year.”

Insightology View:

One number never showed up on this call: net bookings. ASML has replaced its quarterly order disclosure with visibility language. The market loses a high frequency timing signal, but what it gets instead is actually longer visibility: 2027 is close to fully booked, which locks in growth a year and a half ahead.

Look closely: the order intake figure ASML used to publish every quarter appears nowhere in this quarter’s press release or transcript. The last disclosed number was €13.2 billion in Q4 2025. In its place, qualitative language: Low NA EUV orders for 2027 are “close to fully covered,” a “significant number” of Low NA orders are already in hand for 2028, and the backlog keeps growing. Pair that with the capacity plan: Low NA EUV capacity up around 30% in 2027 from this year’s base of roughly 65 systems, DUV immersion up 30% from roughly 130, and a further 30% increase for each under evaluation for 2028.

From the transcript (CFO Roger Dassen): “For 2027, we are now close to being fully covered with orders for Low NA EUV and we are planning to increase our low NA EUV capacity by around 30 percent.”“Looking ahead to 2028, we have already received a significant number of Low NA EUV orders. Strong demand forecasts from our customers have led us to investigate a further 30 percent capacity increase for that year.”“Similarly, for our immersion systems, we intend to increase capacity by 30 percent in 2027 and are investigating a potential further 30 percent expansion for 2028.”“As a result, our backlog continues to increase with a broad mix of customers.”

One detail on pricing power worth flagging: our read is that ASML failed to push a price increase through to TSMC and only raised prices 5% to 10% on smaller customers. Even the most upstream monopolist in the industry is still a price taker when facing its largest customer.

The WFE upcycle keeps extending

The five major WFE buyers (TSMC, Samsung Electronics, SK Hynix, Micron, and Intel) account for the bulk of equipment purchasing, and all five have now confirmed capex upgrade cycles for 2026 through 2028, opening the door to consecutive upward revisions in 2027 and 2028.

Take TSMC as an example. Based on our channel checks, we expect TSMC’s WFE purchasing budget to climb from roughly 70% to 75% of capex over 2026 to 2028. Add to that TSMC’s own capex guidance moving up again, from the top of the prior $52 to $56 billion range to $60 to $64 billion, and the case that this WFE upcycle runs longer than any previous one keeps getting stronger.

Putting the Two Calls Together: Six Things We’re Watching

1. Late July IDM and memory earnings calls. The next checkpoint. TSMC says AI demand is running stronger than it expected at the start of the year; ASML says memory system sales are growing more than 75%. The Intel and memory maker calls starting in late July will mark both claims to market.

From the transcript (C.C. Wei, asked whether the five year AI CAGR guidance from January had changed): “let me give you not a number, but it’s stronger and stronger and stronger. So we don’t give you the number today because it continues to increase.”

1. TSMC’s 3Q gross margin landing, and the currency. Is the 65% to 67% guide another conservative lowball? And if the Taiwan dollar runs stronger than the 32 assumption, it eats further into margins.

2. Intel 18A’s real yield and customer list. We wait for Intel’s call and customer side evidence. This is one variable in the TSMC pricing power narrative, though we think the actual impact on TSMC’s pricing power is limited.

3. Price hikes landing. TSMC is negotiating a broad 10% to 15% foundry price increase for 2027, while management’s public language stops at regular annual price adjustments. When the negotiation shows up in official guidance will determine whether 2027 gross margin holds its ground.

4. ASML’s new visibility metrics. With bookings gone, we track two things instead: whether the “fully covered” language extends into 2028, and whether the 30% capacity plans get raised again.

5. The advanced packaging bottleneck. Management confirmed the CoPoS pilot line is built and needs about a year to mature before capacity buildout begins. We expect volume production in the second half of 2028 at the earliest, with initial capacity of 5,000 to 10,000 wafers per month, aimed at large form factor packages of 14x reticle size and above; the technical path (glass carrier versus square silicon substrate) is not yet settled. The glass core substrate supply chain is taking shape: Innolux on front end glass metallization, Ibiden and Unimicron on back end ABF buildup, with volume production expected around 2028 to 2029. Packaging remains the metronome for AI chip shipments, and the source of the “front end beats, back end shortages” risk.

Conclusion and Thesis

1. Starting from 2026, UMC is expected to gradually move away from the highly competitive environment of low-cost mature processes and shift toward high-value mature processes and specialty technologies. This strategic shift, particularly benefiting from its expansion into US manufacturing, is advantageous for raising the company’s Price-to-Earnings (PE) ratio.

2. The Macro View: TSMC Holds the Line, UMC Steps Up：With TSMC (2330.TW) signaling clearly that it has no interest in acquiring an equity stake in Intel, the spotlight has unexpectedly shifted to UMC (2303.TW). The company is seizing this vacuum to execute a crucial strategic pivot, positioning itself as a stabilizer in the global supply chain.

3. The Core Catalyst: The Intel & Polar Alliance：UMC is moving away from the “build-at-all-costs” model toward smart collaboration.

   • The Intel Partnership: UMC will co-develop a 12nm platform with Intel.

     • The Deal Structure: This is a classic “Asset-Light” play. Intel provides the manufacturing capacity (fabs) and capital expenditure, while UMC leverages its IP and extensive client rolodex to fill that capacity.

     • Why it Matters: UMC gains 12nm capacity without the heavy depreciation burden of building a new fab, while Intel solves its utilization issues.

   • The Polar Semiconductor Deal: Simultaneously, UMC is partnering with Polar to supply high-voltage (HV) power components, specifically targeting Tier-1 US automotive giants.

4. The “Hidden Gem”: Silicon Photonics (SiPh)：Beyond the headline deals, UMC is aggressively planting flags in next-gen connectivity.

   • Strategic Partner: Collaborating with IMEC (Belgium), the world’s leading semiconductor R&D hub.

   • The Tech: Entering the Silicon Photonics (SiPh) front-end wafer foundry market using mature 28/22nm processes.

   • The Timeline:

     • 2026: Pilot Production.

     • 2027: Volume Ramp-up.

   • Significance: As data centers demand higher bandwidth, SiPh is the next bottleneck solver. UMC is positioning itself early in the supply chain using cost-effective mature nodes.

5. The Risk Factor

   • Intel’s Execution: The primary overhang is execution risk on Intel’s part. If Intel struggles with yield rates or mass production timelines for the 12nm platform, UMC’s capacity expansion plans could face delays.

The Analyst Take: A Long-Term Re-rating

This is not an Nvidia-style momentum trade. Do not expect UMC to replicate the parabolic moves of AI component suppliers.

• The Narrative: UMC is transforming from a commodity foundry trapped in price wars to a strategic partner with specialized, high-margin offerings.

• The Playbook: This is a value turnaround play. We are looking for a gradual re-rating of the stock as it decouples from the brutal price competition of standard mature nodes.

• Verdict: Patience is required. Accumulate for the long haul as the “asset-light” strategy begins to improve return on equity (ROE) and margins.

Company Overview and Core Business Transformation

UMC, established in 1980, is currently the world’s fourth-largest wafer foundry manufacturer. UMC’s strategy differs from TSMC; it supports several semiconductor chip design companies (such as Novatek, Faraday Technology, PixArt Imaging, and Holtek Semiconductor) through its own capacity and technology to ensure its foundry capacity utilization rate is maintained. Major customers include international companies such as MediaTek, Qualcomm, Samsung, NXP, and Texas Instruments.

Source : Company

Thesis

I. The Core Business: “Boring is the New Stable”

The Short-Term Reality Check Let’s be blunt: if you are looking for explosive quarterly growth right now, look elsewhere. The core business is currently about stabilization, not acceleration. “Flat” is the new “Up.”

• Utilization Rate (UTR) Recovery: We saw UTR climb back to 78% in Q3 2025. We project a slight moderation to 74%–76% in Q4 due to year-end seasonality.

• Pricing Power (ASP): Despite headwinds, U.S. dollar-denominated ASP (Average Selling Price) is holding steady for Q4 2025.

• The China Factor (The Elephant in the Room): The competitive landscape remains brutal. Chinese foundries (SMIC, Hua Hong) have aggressively expanded capacity across 28nm–90nm.

  • The Threat: In 2025, the bulk of global mature capacity growth is coming from China. Their quotes are often 30–40% lower than Taiwanese peers.

  • The Impact: We anticipate a general 5–10% pricing erosion across the mature node market in 2025.

The Strategic Shift: From Volume to Value UMC is smart enough not to fight a price war they can’t win. They are actively pivoting the revenue mix:

• Old UMC: Low-end, commoditized legacy nodes (highly sensitive to Chinese price dumping).

• New UMC: High-Value Legacy + Specialty Processes.

  • Focus Areas: 22/28nm, Automotive, PMIC (Power Management), High-Voltage BCD, eNVM, and RFSOI.

  • Why it works: These are “sticky” products with higher technical barriers. Clients here care more about reliability and performance than saving a few cents on the wafer.

• Growth Spots: Management expects double-digit growth in 22/28nm revenue and high-single-digit growth in 8-inch PMIC.

II. The Alpha Play: The “Asset-Light” American Expansion

The Headline: While TSMC politely declined to acquire equity in Intel, UMC stepped up to fill the vacuum—not with cash, but with competence.

The Strategy: “Fabless” Foundry Expansion UMC is expanding its US footprint without the heavy anchor of capital expenditure (Capex). This is Asset-Light Expansion 101: Don’t build the factory; just run it.

1. The Intel Alliance (Arizona)

• The Deal: Utilizing Intel’s depreciated Fab 12, 22, and 32 to develop a 12nm FinFET platform.

• The Logic: Intel provides the facility; UMC brings the clients (Realtek, MediaTek, Broadcom).

• Launch: Production scheduled for 2027.

• Synergy: Intel fills empty fabs; UMC gets 12nm capacity without spending billions on concrete and steel.

2. The Polar Semiconductor Partnership (Minnesota)

• The Context: Polar, originally a Control Data factory and later owned by Japan’s Sanken Electric, recently brought in US Private Equity (Niobrara & Prysm Capital) to qualify for the CHIPS Act.

• The Problem: Polar has the funding and the “US Entity” status, but lacks broad technical depth.

• The Solution: UMC injects its 8-inch manufacturing expertise and client base.

• The Niches: Focusing on High-Voltage Power and Sensors (Automotive). Clients include Allegro MicroSystems and Sanken Electric.

Why This is a “Triple-Win”

1. UMC: Gains “Made in USA” capacity at zero construction cost.

2. Intel / Polar: Monetizes idle assets and gains access to the lucrative “mid-range” mobile/comm market (MediaTek, Qualcomm, etc.).

3. Clients: Secures a non-China supply chain for mature nodes, hedging geopolitical risk.

The Financial Impact (The Long Game)

• Short Term (1-2 Years): Negligible financial contribution. UMC is not charging licensing fees during the setup phase.

• Long Term (2027+): This is where it gets interesting.

  • Revenue: Potential for NT$25B–30B (approx. US$800M–1B) annually.

  • Significance: This represents ~10–12% of current revenue.

  • The Kicker: This revenue is “High Purity” Profit. Since UMC didn’t pay to build the fabs, there is no depreciation drag. It flows straight to the bottom line.

III. The Bonus: Silicon Photonics (SiPh)

The “Hidden Call Option” While the market obsesses over GPU computing, data transmission is the bottleneck. Enter Silicon Photonics.

• The Tech: UMC is focusing on PICs (Photonic Integrated Circuits). Unlike logic chips, PICs do not require 3nm processes.

• The Edge: Mature nodes (130nm/180nm) are actually better for this—lower cost, lower transmission loss, and higher CP value.

• The Partner: Collaboration with IMEC (Belgium) to license the 12-inch iSiPP300 process.

• The Timeline:

  • 2026: Pilot Production.

  • 2027: Volume Shipments.

Financial Impact Estimate

• The “Pure Profit” Factor: While a 12% revenue boost (approx. NT$27B) is significant, the real story is the quality of these earnings. Because UMC is utilizing existing factories (Intel/Polar) rather than building new ones, there is minimal depreciation drag. This revenue should flow through to the bottom line at a much higher margin than UMC’s standalone fabs.

• ASP Premium: Note the estimated ASP for the Intel 12nm node ($4,000+). This reflects the “Geopolitical Premium”—clients are willing to pay more for chips guaranteed to be manufactured on U.S. soil to avoid tariff or supply chain risks.

Risk：What Could Break the Thesis?

1. The “China Drag” on Core Earnings (The Involution Risk)

The threat of commoditization in the mature nodes remains the elephant in the room.

• The Scenario: If Chinese foundries (SMIC, Hua Hong) launch an aggressive price war (”involution”) to capture 28nm market share before 2027, UMC’s pricing power will erode.

• The Impact: We estimate this could compress UMC’s standalone EPS from ~NT$4.0 to ~NT$3.0.

• The Net Result: Such a decline in the core business would effectively neutralize the financial accretion gained from the new U.S. operations.

2. Intel’s Execution Risk (The “Wildcard”)

In my view, this is the single largest variable in the equation.

• The Scenario: Intel’s financial health is volatile. Risks include a further deterioration of their balance sheet forcing a divestiture of fab assets, or technical friction during the 12nm technology transfer.

• The Impact: If the deal crumbles due to counterparty risk, the projected ~NT$0.60 EPS upside from the U.S. expansion effectively evaporates to zero.

Conclusion

The Analyst Take: UMC is a long-term structural transformation play, not a short-term trade.

• Manage Expectations: Do not expect the parabolic stock price action seen in AI hardware component suppliers. This is not an Nvidia proxy.

• The Narrative: We are watching a slow-burn decoupling. UMC is gradually exiting the “low-tide” cycle of commoditized price wars and moving toward value-added partnerships.

• Conclusion: This thesis requires patience. The “Asset-Light” strategy will take time to reflect in the ROE, but the direction of travel is correct. Wait for the strategy to bear fruit.

Disclaimer：My crystal ball is currently in the shop for repairs. While I believe in this thesis, I cannot predict the future (or what Intel will do next week). I am sharing my notebook, not managing your portfolio. If you make millions, you’re welcome. If you don’t, remember: I’m just a writer on the internet.

One Big Beautiful Bill Act

1. Lower federal corporate income tax from 35% to 21%, easing the overall tax burden on businesses.

2. Restore 100% expensing for capex (bonus depreciation) as in the 2017 Tax Cuts and Jobs Act—allowing full first-year deduction of qualified capital expenditures. This shortens payback periods for capital-intensive firms (e.g., major CSPs).

3. Full expensing of domestic R&D: To incentivize U.S. production and research, eligible R&D costs can be fully expensed in the year incurred, benefiting companies such as OpenAI and Anthropic.

America’s AI Action Plan

1. Accelerate AI innovation by ensuring the U.S. builds the most capable AI systems, removing unnecessary barriers and encouraging open-source.

2. Scale AI infrastructure by fast-tracking reviews for data centers, foundries, and power projects—clearing obstacles to capacity expansion.

3. Uphold diplomacy and AI security: shape global rule-setting, export U.S. AI capabilities, prevent leakage of advanced compute to competitors, and collaborate with allies—supporting the rise of Sovereign AI.

TTMI stands to benefit from this policy backdrop.

Big Four CSPs: Capex is accelerating compute build-outs

• Microsoft (~30–40% to GPUs)

  • Q2 2025 capex of $24.2B, primarily for data-center build-outs.

  • Capex expected to moderate in 2026.

• Google (~60% GPUs + TPUs / 40% networking)

  • Q2 2025 capex of $22.4B.

  • 2025 capex guidance raised from $75B to $85B.

• Meta

  • Q2 2025 capex of $17.0B, focused on servers and networking; also reflects higher procurement costs.

  • 2025 capex lifted to $66–72B; 2026 growth comparable to 2025.

• Amazon (>50% to AI)

  • Q2 2025 capex of $31.4B; Q3–Q4 to remain at similar levels.

  • 2025 capex revised above the prior $105B expectation.

Server BOM snapshot: PCB share is modest—but value growth is striking

Type & price bands

• General-purpose servers: $3,000–$15,000 (assume $9,500).

• AI training: $200,000–$3,000,000 (assume $250,000; large clusters can run into the millions).

• AI inference: $60,000 (typical build).

• Training + inference hybrids: $1.5M–$3.0M, depending on scale and redundancy.

What drives PCB demand higher

• Versus general-purpose boxes, AI systems add GPUs and push upgrades in storage, cooling (air → liquid), power (higher draw), and PCBs (layer count, thermal performance, reliability).

• Under GB200 architectures, modular topologies like 4+9+5 / 8+9+10 increase PCB count and specs; for similar rack-level configurations, PCB value can be ~1–2× higher than in traditional training builds.

ASIC ecosystems need capacity slotting—and a shift back to North American manufacturing

TTMI is currently the largest PCB manufacturer in North America, with nearly 25% of revenue coming from data-center customers. Based on our research, downstream CSP leaders—AWS, Meta, OpenAI, Google, Microsoft, and NVIDIA—are pulling in more orders from TTMI to both diversify supply chains and increase North American production.

The company is expanding across North America and Malaysia:

• Investing $500 million to build a new plant in Syracuse, New York.

• Acquiring a 750,000 sq. ft. facility in Eau Claire, Wisconsin.

• Adding 800,000 sq. ft. in Penang, Malaysia, and securing adjacent land to prepare for a second facility as demand continues to rise.

Notably, TTMI’s Malaysia site sits next to Taiwan Union Technology (TUC) in Penang, enabling tighter material and supply-chain coordination.

Why it matters

• TTMI derives ~50% of revenue from Aerospace & Defense, much of it tied to radar systems.

• Rising budgets for missile and space programs → stronger radar demand, directly benefiting TTMI.

By the numbers / Detail

• Backlog: $1.46–$1.55B at Q1-end, ~1.5 years of revenue visibility.

• Award momentum: additional wins across Javelin and LTAMDS.

• Platforms in scope (examples):

  • F-35, shipborne SPY-6 / SPY-7 radars

  • MH-60 rotorcraft radar

  • LTAMDS for the PAC-3 ecosystem

• Capacity build-out: New facility in Syracuse, NY, purpose-built for Ultra-HDI PCBs targeting mil-grade applications.

The big picture / Between the lines

• Shipbuilding upcycle: 14 new ships funded in FY2025—a record. Destroyers, frigates, and carriers all require SPY-6.

  • TTMI is positioned as the sole BFN and key PCB supplier for SPY-6.

• Missile defense surge: “Golden Dome” at $27B plus ~$25B across broader missile defense accelerate IBCS and LTAMDS deployments.

  • TTMI supplies core electronics into these systems.

TTMI exposure to U.S. defense budget (snapshot)

What’s next

• Convert backlog to revenue + ramp Syracuse: uHDI adds capacity against long-cycle shipbuilding and missile-defense programs.

• Radar tailwinds: SPY-6 / LTAMDS scale-up sustains multi-year visibility; TTMI’s critical sub-system role amplifies operating leverage.

—
Note: Information compiled from your brief; this is not investment advice.