We refresh our target price post the release of the mid-quarter update for 2Q09. We continue to rate the stock Neutral, on a target price of S$2.20 which implies a price/book ratio of 0.8x.

Improved utilisation for 2Q09. Chartered’s mid-quarter update indicates that the recovery momentum has now moved to more mature nodes, with its blended utilisation for the quarter rising to 61% which is in line with our forecast (its previous guidance for 2Q09 was 58%).

Welcome improvement from mature nodes. The increase came mainly from mature nodes, welcome news as it broadens the recovery theme beyond its advanced 12” nodes (where utilisation has been high). Consequently, the net loss for 2Q09 has been trimmed by US$10m to a loss of US$49m for the quarter. Blended utilisation for FY09 is now 59% vs 56% previously.

Inventory restock trade done. The inventory restock trade is now fully extended, with Chartered’s valuation based on price/book ratios having doubled in the past six months. Utilisation has risen by about 56% sequentially (1Q utilisation was a mere 39%), which fits with the massive inventory restock theme. We expect blended utilisation to improve to the 65-70% level across 2H09.

We have revised FY09 net loss down by 38% as we raise our utilisation forecast for 2H09. FY10 remains as a net loss year. Our new target price of S$2.20 implies a price to book of 0.8x (vs our previous target price of S$1.60 which implies a price/book of 0.6x). 12-month price target: S$2.20 based on a Price to Book methodology. Catalyst: Changes in Chartered’s blended utilisation rate.

While we recognise the upward momentum in blended utilisation rates, an improved balance sheet post its US$300m rights issue and even the potential of a joint relationship with the Middle Eastern owned Global Foundries that could help on capex savings - much of this has been captured when we move the rating from Underperform to Neutral a quarter ago. We are sticking to this rating. Our technology team has put on a cautionary bias as our proprietary ERC has started to peak-out. Unless we adjust our macro view that secular demand has now returned (ie, the tech industry moving beyond restocking) which will help return the company to sustainable profits in FY10, outside a generous privatisation offer, we believe there is little room for valuations to expand further from the current price/book ratio at 0.8x. Chartered is scheduled to report 2Q09 results on 24 July 2009.