Chartered Semiconductor’s (CSM) Q209 revenue increased to US$349m, up 43% QoQ and in line with its revised guidance. However, we see a bigger gap between CSM and its competitors, again, as its peers recorded 80-100% QoQ growth during the same period.

Limited cost-cutting achievement except change in accounting method CSM said it would reduce the break-even CUR to 75% (from 85% in 2008) in H209 through more revenue from its leading-edge processes and cost-cutting efforts. However, so far we have not seen any significant improvement except that the company raised the projected useful lives of its 12” equipment (hence reduced depreciation charges). CSM’s EBITDA margin kept declining in the past few quarters, even though revenue from advanced processes increased.

Q309 guidance—no surprise except raising capex CSM guided for Q309 revenue to increase by 9-13%, in line with our estimate of 10-15% QoQ. The company believes ASP might drop by 2-7% due to more revenue contribution from mature processes. In addition, CSM decided to raise 2009 capex from US$375m to US$500m. We think it was a tough decision to make given its poor profitability and lack of working capital.

Valuation: lower price target to S$1.70; maintain Sell rating We reduce our 2009/10/11 EPS estimates from US$(0.23)/(0.17)/0.05 to (0.25)/(0.18)/0.03. We lower our price target from S$1.85 to S$1.70. Our price target is derived from an unchanged multiple of 0.5x 2009E P/BV.