Chartered provided 1Q09 mid-quarter guidance and proposes a 27-for-10 rights issue at S$0.07 each to raise US$300m. 1Q09 losses are expected to be narrower than earlier guidance due to increased orders from customers for early 2Q09. Although 1Q09 net losses are expected to come in narrower than our earlier assumption of US$160m, our operating loss assumptions for FY09-11 remain unchanged given generally limited order visibility. However, we have reduced our interest expense assumptions by about US$12m to factor in funds raised from the rights issue, thereby lowering our loss assumptions for FY09-10 by 3-5%. Our FY11 profit forecast has been raised 45% for the same reason. Our target price, post-rights issue, falls from S$0.295 to S$0.11, still based on 0.5x P/BV. Downgrade from Outperform to Underperform, given limited upside potential post-rights issue.

Announces rights issue – Chartered announced a 27-for-10 rights issue offering to raise ~US$300mn in proceeds. The rights will be priced at S$0.07, ~66% discount to Monday's closing price of S$0.205 (note: stock fell 18% intra-day before trading was halted). Temasek has agreed to subscribe for its pro-rata 59% share and committed to act as standby purchaser (up to 90 percent of offering). CHRT's decision to improve its capital position is a positive, in our view, and should remove the stock overhang on its balance sheet concerns.

Rationale – Management is raising capital to strengthen its balance sheet and to enhance its financial flexibility, enabling CHRT to capture investment opportunities should the opportune time arises. Our current forecast suggests CHRT risks breaching its financial covenant by 2011 should book value contraction turns out to be worse than expected.

Financials – The rights issue price is a 34% discount to theoretical ex-rights price of S$0.106. Assuming full subscription, 09E net debt position would decline to US$1.4bn (88% net debt equity, down from 134%) and 2010E book value per share would reach US$0.14 (vs pre-dilution US$0.40). The implied fair value post rights would be at S$0.07, based on our current target fair value multiples.

Operational update – CHRT reiterated 1Q09 revenue guidance and sees end market demand stabilising with wafer starts for the second quarter picking up. The strength arises mainly from Communication customers (wireless, digital tv). Also, CHRT is not revising its capex spending.