Takeover denied. Chartered officially denied The Business Times’ report that it has received a S$2.45b bid from Advanced Technology Investment Co. (ATIC), a technology investment company wholly owned by the government of Abu Dhabi to buy Temasek Holdings' 62% stake at between $2.40 and $2.60 a share. Nevertheless, Chartered mentioned that management will from time to time engage in discussions concerning opportunities and strategic directions of the company.

An ideal pair if successful: ATIC already owned GlobalFoundries through a JV with Advanced Micro Devices (AMD). The deal, if successful, will immediately lift ATIC’s Global foundries market positioning with an Asian footprint and proven capacity. Its only manufacturing base now is in Dresden, Germany. Furthermore, there is access to Chartered’s bigger pool of ready customers. For Chartered, other than a stronger financial backing, the new relationship bodes well given the possibility of spillover orders from AMD, which could instantaneously fill spare capacity and boost its operating performance.

Semicon recovery remains on track. Apart from consecutive monthly growth in semicon Book to bill ratio from 0.47 in Jan to 0.65 in April, chip maker Marvell (also Chartered’s customer) last night topped consensus estimates for Q1 ending May 09 and indicated improvement in near term order patterns. Elsewhere, Qualcomm lifted revenue forecast on 3G related demand and TSMC continues to call back laid off workers. In view of continuous improvement in the industry, we have rolled our valuation peg to 1.3x P/B (mid cycle valuation). Consequently, our new TP is S$3.50 (~60% upside). Upgrade to Buy.

Too fast, too soon. FSSTI rose 50% in eight weeks, the fastest recovery from a bottom ever. FSSTI’s gain from the 9 March 2009 bottom is higher than most regional indices. In history, such magnitude of recoveries has only occurred when economic growth has swung from negative to positive. While there is the argument on liquidity supporting this large rerating, we believe the “green-shoot” recovery has been priced to a great extent.

Valuations – versus history and region. Singapore now trades at 1.4x trailing book, still lower than historic average (1.9x). However, the ROE profile is also significantly lower, with three-year forward ROE likely to remain in the 8-10% range, as against the long-term average of 14.6%. On regional basis, Singapore looks more expensive than its peers. Our target price on the index is now at 2,260, which is the average of our PB based target (2,502), P/E based target (2,159), and our bottom up target (2,125). This leaves a mild 7% upside from current levels.

Earnings cycle to lag. Further improvement in index levels will need to be supported by earnings growth momentum, which is unlikely to happen in the near term. Our bottom-up estimates factor a 45% peak-to-trough correction in Singapore earnings, with a 27% and 4% YoY contraction expected in 2009 and 2010. We note that our Singapore earnings profile is skewed towards (55%) sectors like banks, property, and industrial, which typically see delayed earnings recovery.

Our likes and dislikes Our top picks for the market are

United Overseas Bank (UOB SP - S$14.88 - BUY) for a better quality loan book,
CapitaLand (CAPL SP - S$3.41 - BUY) for its diversified asset base,
A-Reit (AREIT SP - S$1.40 - BUY) for its stable earnings flow,
SingTel (ST SP - S$3.04 - O-PF) for its market share growth,
Singapore Press Holdings (SPH SP - S$2.94 - O-PF) for the potential uplift in consumer sentiment,
ST Engineering (STE SP - S$2.36 - BUY) for its strong maintenance repair and overhaul (MRO) franchise,
Olam (OLAM SP - S$1.93 - BUY) for the structural food ingredient demand story, Ezra given its strong earnings outlook.

Our key negative ratings are for companies where were see structural problems in their market place, or business strategies. These include

OCBC (OCBC SP - S$7.38 - SELL) for its expected longer provisioning cycle than peers,
CapitaCommercial Trust (CCT SP - S$1.04 - U-PF) for a rather bleak outlook for Singapore office rentals,
Cosco (COS SP - S$1.16 - SELL) for weak charter rates and lack of new orders,
Comfort Delgro (CD SP - S$1.34 - SELL) due to headwinds in the group’s taxi and bus businesses,
Noble (NOBL SP - S$1.55 - SELL) for its weak earnings growth outlook.

3Q09 in line with expectations. Eu Yan Sang International Ltd (EYS) leveraged on its seasonally strong quarter to deliver a credible set of 3Q09 results. Both sales and earnings were in line with our projection, with its 9M09 earnings forming 80% of our full-year estimate. Revenue grew 10.7% YoY to S$67.9m. Net profit surged 191.7% to S$3.8m in the absence of impairment charges relating to the disposal of Red White and Pure. Stripping away the impact of one-off items and eliminating the impact of losses from discontinued operations included in 3Q08, core operating profit would have risen by 6.6% but net profit would have fallen by 15.3%. Effective tax rate swelled to 38.7% from 29.5% due to losses at its foreign subsidiaries which could not be offset against group profits.

Growth in sales across key markets. The group registered higher sales across all its key markets despite the soft retail climate. In particular, Malaysia turned in an outstanding 17% YoY growth in revenue thanks to strong hamper sales during the Chinese New Year season. Singapore recorded a 7% improvement in sales, while Hong Kong delivered a 4% growth in turnover. The group's robust sales growth was boosted by the opening of new stores. It opened one new store in Malaysia and two in Hong Kong in 3Q09, bringing the net increase in store count for 9M09 to 10 retail outlets.

Improvement in credit metrics. Cash flow strengthened significantly thanks to the group's sound performance. Operating cash inflow grew to S$13.9m from S$0.4m a year ago. Operational metrics similarly showed encouraging improvements. Cash conversion cycle improved to 90 days from 109 days, inventory days declined to 163 days from 171 days, while net gearing dropped to 6% from 21% on an annualized basis. Management has heightened its vigilance over receivables and cash conservation in light of the tightening credit market. We understand that the group has not had to write off any receivables thus far.

Maintain HOLD with a higher fair value estimate. Although EYS has performed reasonably well, management remains cautious over its outlook given the jittery economic conditions, which could dampen consumer spending. We are leaving our estimates intact as the group is on track to meet our S$13.1m net profit estimate for FY09. Our valuation parameter has been raised to 10x (from 8x) along with the re-rating of its peers, bringing our fair value estimate to S$0.37 (from S$0.30). We maintain our HOLD rating on the stock.