Post Chartered’s recent rights issue and the shares’ 100% rise over the last month, the stock is trading at 0.6X 09E P/B (fully diluted). We downgrade Chartered to Sell from Neutral, as we view the shares as overvalued. We estimate that 1) its ROE can reach only 5% and -0.3% at 100% utilization and its avg utilization of 75% over the last 5 years, respectively, with a stretched depreciation schedule of 7 years (vs. 5 years at TSMC and UMC); 2) Chartered is gaining market share at 65nm/40nm, but the return of its 65nm/45nm business was negative in 1Q09; 3) Chartered has not had positive annual free cash flow since inception and will likely require further financing in 2009-10.

1) Chartered completed a rights issue that should add about 2bn floating shares, or 21% of total shares outstanding in April 2009, by our estimates. These rights have very low costs (S$0.07/US$0.46 for local/ADR share) and have no lock-up period; as such, we expect some investors to take profit from the rights issue soon. 2) According to management, Chartered needs additional financing of US$300mn-$400mn in 2010 in order to satisfy debt repayments, loan covenant, and capex needs. Thus, we expect increased uncertainty over Chartered’s capex and R&D expenditures.

We have recently raised our 2009 foundry shipment forecast to -28% yoy from -45% yoy in light of stabilization in end demand. Accordingly, we raise our rev/EPS estimates for Chartered by 11%–22% and 76%–83% in 2009E-2011E, respectively. We raise our 12m local/ADR TP to S$0.13/US$0.80 based on 0.5X 2009E P/B to reflect our higher semi forecasts.