We liked the solid traction achieved at the advanced 65nm process (27% of 2Q FY09 revenue compared with 21% for 1Q FY09) and the 45/40nm process (10 customers engaged). The company is confident of providing the industry’s most optimised process for ARM-core systems-on-chip at the 32/28nm process and guided for a strong gross-profit margin improvement for 3Q FY09 (more lowcost wafer shipments). We think Chartered could break even at the operatingprofit level for 3Q FY09. However, we disliked the downward revision in its ASP guidance for 3Q FY09 and the lack of a clear funding plan for redeeming bank loan/bonds (US$800m) and capex (US$700m by our estimate) in FY10.

FY09 capex raised. As we expected, Chartered raised its FY09 capex target to US$500m from US$375m to increase capacity at the 65nm process at fab-7 to meet customer demand from early 2010. For 3Q FY09, the company guided for revenue to rise by 9-13% QoQ, ASP to fall by 2-7% QoQ, the utilisation rate to increase to 70±3% from 60% for 2Q FY09, and a net loss of US$22m±5m.

2Q FY09 revenue and pre-tax profit were in line with our above– Bloomberg-consensus estimates. The 2Q FY09 net loss of US$39m was lower than our estimate of a loss of US$42m due mainly to a tax write-back, while the revenue of US$349m, up 43% QoQ, was in line with our estimate. The blended ASP declined by 1.8% to US$910, while shipments increased by 59% QoQ to 385,000 wafers and the fab-utilisation rate rose to 60% from 38% for 1Q FY09.Valuation

Our six-month target price of S$2.20 is based on a target PBR of 1.0x on our FY10 BVPS forecast. We have used an FY10 book-value forecast as we expect the company’s book value to continue to deteriorate in 2010. Chartered’s threeyear- average PBR is 1.02x (a range of 0.2-1.9x).