Chartered’s (CSM) lowered guidance should come as no surprise given scoresof downward revisions by other tech giants recently. In response, we havewidened FY08 losses from US$39m to US$84m and FY09, from US$100m toUS$275m. We believe order pushouts and inventory tightening will persistthrough FY09. Nevertheless, we maintain HOLD on CSM as the stock isundemanding at 0.2x P/B and looks an attractive takeover target now that itis priced far below replacement costs.

4Q08 sales cut to US$343m-US$353m, down 24-26% q-o-q, compared with priorguidance of US$362m-US$374m. In addition, CSM expects gross margin tocollapse to 4.3% from 14% in 3Q08 along with lowered utilization forecastof 58%-62% compared to 60%-66% previously. Management now expects net lossto widen to US$80m in 4Q08 from US$24m in 3Q08 and prior guidance ofUS$57m.

FY09 looks worse with deepening recession. CSM will further cut costs,which is helpful to margin. But, we feel that collapsing demand is far morecritical for high fixed-cost business like foundry. Hence, we can expectmore losses next year until demand recovers, probably in 2H, if theindustry over-corrected to the extent that capacity is not available tocope when downstream begins to re-stock.

But M&A is a credible catalyst. With enterprise value at S$2b, potentialbuyer would be getting CSM’s wafer fabs- one 300mm and five 200mm fabs - ata price far below replacement cost, since a leading-edge 300mm fab likeCSM’s Fab 7 already costs more than US$2b. Word on the street has alreadybandied both TSMC and UMC to be interested buyers. Technologically, wethink CSM would be a better fit for UMC.

Maintain Hold but revised TP to S$0.25, based on a lower industry averageof 0.3x FY09 P/B.