We adjust our net loss forecast from US$481m to US$280m for 2009 and US$263m to US$236m for 2010 to reflect better order momentum in 2Q09. We raise our TP to SGD0.7 from SGD0.18 to factor in shares consolidation and lower net loss. However, our TP implies 70% downside potential, and we are concerned about the company’s profitability due to slower ramp-up of advanced technology and unfavorable margin trend in the long term. We maintain Sell.

While the company raised its sales and margin guidance for 2Q09, the guided net loss remains substantial. Mid-point loss per ADS should reach US$0.62. We expect sales to grow 10% QoQ in 3Q09 driven by communication and PC customers. However, we expect net loss per ADS of US$0.50 in 3Q09. This is attributable to overly aggressive pricing strategies and slow improvement pace in the yield rate for advanced nodes.

We see evidence of deteriorating cost structure. While the utilization rate rose during 2006-08, margins continued to trend down. We expect this downtrend to continue as the company’s cost structure may worsen with the ramp-up of 45/40nm capacity. We believe a limited customer base and disappointing progress in 45/40nm node will lead to continued net losses in 2010-11.

Our target price is based on 0.4x average 2009-10E PB, which is in line with the historical trough, and reflects that its average 2009-11E ROE of -15% is far below the cost of equity of 7.5%. We disagree with the Street’s argument that the company could be a beneficiary of an economic recovery. Indeed, its uncompetitive balance sheet and poor P&L may trigger more financing risks and hence lead to a stock de-rating. Upside risks: better execution in advanced technologies and stronger demand.