We maintain our Neutral rating on Chartered Semiconductor (CSM). Despite the improving capacity utilization rate (CUR) and better profitability, we think the risk/reward is not attractive given: 1) refinancing risks; 2) limited opportunity to achieve break-even; 3) the stronger competition from UMC for 65nm in H209; and 4) the likelihood of foundry CUR peaking in June or July.

CSM’s Q109 operating loss of US$102m is US$10m lower than our expectation. The main reason for this comes from lower depreciation cost as the company raised projected useful lives of 12inch equipment. The rest of the results are in line with our estimates.

CSM expects 52% QoQ shipment growth and 36% QoQ revenue growth. The momentum is in line with its peers, in our view. Also, the company expects revenue contribution from 65nm and below to increase from 25% in Q109 to 30% in Q209. CSM has already started producing 45nm networking chips (with silicon on insulator technology), and hopes to manufacture some CPU products in Q2.

We revise our 2009/10 EPS estimates from US$(0.13)/(0.06) to (0.04)/(0.02). We lower our price target from S$0.32 to S$0.17 based on a lower book value per share (from S$0.81 to S$0.34) after dilution from the new rights issue (weighted average outstanding shares increased from 3,835m in 2008 to 7,778m in 2009). Our price target is derived from 0.5x 2009E P/BV (previously 0.43x 2009E P/BV).