2Q09 results ahead of expectations. Chartered Semiconductor reported its 2Q09 results last Friday. Revenue fell 23.7% YoY (+43.1% QoQ) to US$349.0m but was slightly ahead of our expectation of US$340.4m and its revised guidance of US$338-348m. Net loss attributable to Chartered, on the other hand, registered US$39.4m, reversing its profit of US$43.4m in 2Q08 (US$98.8m loss in 1Q09), but similarly exceeded our estimate of US$50.7m loss and its guidance of US$45-53m loss. Key variances between our quarterly forecasts and the results came mainly from higher revenue, a US$18m favorable impact from a change in depreciation policy (effective from 4Q08), stronger contribution from associates, and a US$8.8m tax benefit from recognition of deferred tax assets for Fab 3E's unabsorbed wear-and-tear allowances and tax losses. For 1H09, we note that revenue totaled US$593.0m (-29.9% YoY, -27.3% HoH), making up 46.9% of our FY09 sales projections, while net loss reached US$138.2m (2Q08: US$45.8m profit, 1Q09: US$138.4m loss), or 55.6% of our full-year loss figure.

Communications and computer sectors to drive 3Q09 growth. As Chartered progresses into 3Q09, it is seeing healthy sequential growth in its business, driven mainly by the communications sector and computer sector to a lesser extent. Based on the current outlook, the group is expecting its 3Q09 revenue to hit US$382-394m (up 9.5-12.9% QoQ) and its net loss to narrow to US$17-27m. Its utilization rate, likewise, is expected to improve to 67-73% from 60% in 2Q09. In order to capitalize on the momentum seen in its leading-edge technologies and customer engagements, Chartered is also increasing its FY09 capex to US$500m from US$375m as guided previously. We understand that this additional capex will be used to increase Fab 7's capacity to 31,000 12-inch wafers per month by 1Q10, although it is not expected to add significant capacity this year.

Reiterate SELL. We have revised our FY09 sales forecast upwards by 7.7% to take into account of the better outlook. While it is without doubt that Chartered has been making significant improvements in its business operations and financial position, we believe that the group may only reach its breakeven utilization of 75% in 2Q10, as opposed to 4Q09 as expected by management. At current price, the stock also seems to have run ahead of its fundamentals. As such, we keep our SELL rating for now, but revise our fair value upwards from S$1.40 to S$1.46 (0.6x FY09F NTA) on better earnings forecasts.