CSM reported 2Q09 sales of US$349mn (+43% q-q) in line with our estimates. The net loss was US$42mn, marginally better than our estimates, on the back of gross margin at 8.9% (our estimate: 8.3%; see Exhibit 1) as 65nm made up 29% of sales in 2Q09, up from 24% in 1Q09. For 3Q09, CSM expects sales to grow 9 to 13% q-q, with the portion from 65nm and below expanding to 33% of sales. CSM raised its FY09F capex to US$500mn (earlier: US$375mn) citing the need to expand capacities at leading edge (Fab 7). With this capex, Fab 7 capacity will rise to 29K wpm (12” equivalent) by end-4Q09 and 31K wpm by end-1Q10 (earlier: 27K wpm).
Demand in 2Q09 was owing to inventory correction winding to an end; in 2H09 the baton has passed on to end-demand. While no one can claim visibility on demand, we are encouraged looking at results from chipmakers so far with common themes emerging: 1) orders strengthening throughout 2Q09, resulting in healthy backlogs in July; 2) further declines in inventories at chipmakers in 2Q09 from the already low levels at end-1Q09; 3) channel inventory of finished products remains flat q-q; and 4) more regions are participating in the upside with the US showing signs of stability.

The latest signs come from Broadcom (CSM’s largest customer), which expects sales to grow 7 to 14% q-q in 3Q09 post 22% q-q growth in 2Q09. The key surprise was that it expects inventories to fall further in 3Q09 after the 5 day q-q decline to 49 days in 2Q09 (target inventory of ~46 days); citing capacity shortages at the leading edge.

On our revised assumptions as shown in Exhibit 2, we now expect CSM to report normalised net losses US$202mn and US$92mn in FY09F and FY10F, respectively (earlier: normalised net losses of US$230mn and US$99mn). While we largely maintain our utilisation assumptions, we have raised our sales forecast for FY10F by 6% to US$1.52bn (earlier: US$1.44bn) given the increase in Fab 7 capacity.

While we do not see another leg-down in demand, we maintain our NEUTRAL on CSM on concerns of increased funding requirements as capex spending resumes. We now see our price target at S$2.30 (earlier: S$2.21) which is pegged to an FY09F P/BV of UMC of 1.0x (method unchanged). Upside risks to our price target comes from: 1) stronger than seasonal demand growth in 2H09; and 2) faster than expected cost reductions. A key downside risks to our price target is if the credit situation worsens, which could see CSM being unable to meet its debt obligations.