Investment conclusion: In terms of execution, Chartered’s management is doing the right things in terms of cutting costs and ramping business. However, given the poor balance sheet, we see the company in a difficult position in that it must spend to keep up with peers, but doing so weakens its balance sheet even more. Given the uncertain macro environment, we continue to favor industry leader TSMC (NT$57.20). For those that want more beta and lower valuation, we see UMC (NT$12.95) as a more attractive investment than Chartered. Our estimates remain essentially unchanged post 2Q results.

What's new: Chartered reported 2Q09 revenues of US$349 million versus guidance and consensus for US$334 million. ASP declined by 1% versus guidance for a 5% decline. For 3Q09, company guided for 3Q09 revenues of $388 million at midpoint, in-line with consensus for $389 million but below our forecast for US$434 million. This represents sequential growth of 9-13%. Although revenues were below our expectation, high margins keep our EPS forecasts unchanged.

Management also guided for higher capex in 2009, now at $500 million versus $375 million previously. What’s next: Foundry investors are focused on sustainability of recent strength into 4Q09 and 2010. While we do not have a crystal ball on demand, we are positive as semi inventories remain lean, we believe expectations are low, and valuations for the most part are not stretched. We believe stocks could work through earnings season and as 4Q visibility improves.