CNA, 21 July 2006

Chartered Semiconductor's Q2 net profit lower than expected

SINGAPORE : Chartered Semiconductor, the world's third largest contract chip maker, reported lower-than-expected second quarter net profit and warned of challenges ahead as it put off building another plant. Net profit at 9.97 million US dollars was down from 25.27 million dollars in the three months to March and below forecasts by the company of 11-21 million dollars and by analysts at 13.5-20.1 million dollars. In the year-earlier second quarter, the company had reported a loss of 67.1 million dollars, the Singapore- and Nasdaq-listed company said. Second quarter revenue, however, jumped 88 percent year-on-year to 364.8 million dollars, boosted by significant growth in the consumer sector, Revenue for the six months to June rose to 720.1 million dollars from 375.4 million dollars in the first half last year.

Chia Song Hwee, Chartered's president and chief executive officer, described recent changes in the semiconductor market as largely unanticipated, forcing the company to suspend plans to build another plant. "We do see the general market weakness slowing our overall growth plan for this year," he said. "There are near-term challenges that we need to address due to the current market environment. However, we remain committed to our growth strategy and the direction of our company remains unchanged." At the same time, Chia said the market's sudden slowdown meant the company would suspend plans for a new manufacturing plant. "We did start the feasibility study -- looking at our various plants (but) given the sudden change in the business environment, I think it is not appropriate for us to do anything beyond that at this point in time," he said. "As we moved into 2006, everybody had good expectations that it was going to be a decent growth year. Even right through to April and May, analysts were still raising their expectations of growth but recently that has changed."

The semiconductor industry is now faced with concerns including excess inventory buildup, a cyclical downturn in demand and price erosion. There are also worries that high energy prices and rising interest rates may dent consumer spending. "We still believe that the semiconductor industry will grow year-on-year, the foundries too, but people will have to temper their growth rate (expectations)," Chia said.

George Thomas, senior vice-president and chief financial officer, said Chartered expected flat revenues for the third quarter, "In comparison to the second quarter, we see significant weakness in the consumer sector, primarily due to a decline in revenues from video game devices," Thomas said. The communications business may also weaken but to a lesser extent and the computer segment should offset that, he added.

Analysts were already downgrading their estimates for Chartered Semiconductor in light of the second-quarter report. Pranab Kumar Sarmah, an analyst with Daiwa Institute of Research, said his full-year net profit estimate will probably be below 100 million dollars, down from his earlier forecast of 132.90 million dollars. OCBC Investment Research said it was paring back its full-year 2006 revenue estimates from 1.55 billion dollars to 1.46 billion, with the net profit forecast cut from 100.3 million dollars to 65.7 million dollars. - AFP/ir/ls

Extracted From UOBKH @ 24 Oct 05

Chartered Semiconductor
3Q05: Looking forward to profits

Chartered reported net loss of US$34.5m in 2Q05, lower than our forecast of US$47.8m. It achieved revenue exceeding guidance for the quarter.

Growth driven by Consumer sector. Revenue expanded 49.5% qoq to US$290.1m (guidance: up 44-48%). This is driven by significant growth in the Consumer sector followed by the Communications sector. The Consumer sector expanded from 16% of sales in 2Q05 to 32% in 3Q05 boosted by demand from video game console and set-top box applications. Wafer shipment increased 32.8% qoq to 270.7 thousand wafers (8-inch equivalent) with capacity utilisation improved from 65% in 2Q05 to 74% in 3Q05. Fab 7 commenced production of 12-inch wafers in Jun 05 and accounted for 24% of sales in 3Q05.

New Fab 7 boost technology migration. Revenue contribution from 0.13 micron and below process technologies expanded from 23% of sales in 2Q05 to 41% in 3Q05 and crossed the US$100m mark this quarter. 90-nanometer shipment from Fab 7 alone accounted for 24% of sales. This led to a 13.4% increase in ASP to US$1,035 per wafer while EBITDA margin expanded from 35.6% in 2Q05 to 41.6% in 3Q05. SMP (Fab 5, JV fab with Agere) contributed income of US$4.2m.

Looking forward to profits. Chartered guided sequential revenue growth of 22-25% in 4Q05 and expects capacity utilisation to reach 79%. This will be driven mainly by the Consumer sector due to seasonal upswing in demand for applications such as video game console, MP3 player & recorder and set-top box. It will benefit from initial volume build for IBM's new 90nm silicon-on-insulator product used in video game consoles. Revenue from 0.13-micron and below process technologies will represent 46% of sales in 4Q05 (90-nanometer alone to contribute 27% of sales). ASP is expected to increase further by 6-10% qoq to US$1,116 with the migration to 90-nanometer process technology. Chartered targets to lower the breakeven utilisation from 85% in 4Q04 to 75% in 4Q05 and management has guided net profit of about US$10m in 4Q05.

The Chartered-IBM technology platform has gained acceptance in the market place with Samsung and Infineon participating in the joint-development effort at 65-nanometer. Fundamentals have improved as Chartered closes the technology gap with competitors in Taiwan such as TSMC and UMC. We expect Chartered to trade between P/B of 1.2x to 1.5x (UMC: 1.34x and TSMC: 3.00x) or S$0.98 to S$1.22 (NTA/share at Jun 05: S$0.814).

Expanding customer base. Chartered is expanding its customer base for Fab 7 and is working on new projects involving network processor (already started small volume production), baseband (production to start late-1Q06 or early-2Q06), microprocessors (production for AMD to commence late-2Q06) and graphics (production to start for 0.11-micron in 1Q06 and 90-nanometer in 2H06) applications. Chartered is already engaging three customers at the 65-nanometer technology node. Test chips for the three customers will be ready by end-2005 and production is likely to commence in FY06. Chartered plans to increase production capacity at Fab 7 from 9,000 wafers/month at Dec 05 to 15,000 wafers/month at Jun 05, with further increase to 18,000 wafers/month if demand proves to be sustainable.

SINGAPORE

Chartered Semiconductor (CSM SP)

HOLD
Current Price: S$1.02

Extracts fm Lim and Tan Report dated 24-Oct-05,

• 3Q2005 sales rose 44% qoq and 3.3% yoy to $317mln, above management’s guidance of $312mln while bottom-line narrowed from a quarter ago’s loss of US$67mln to US$34.5mln (a year ago’s profit was US$16.2mln), better than management’s guidance of a loss of US$42mln.
  
• The better than expected results reflect a better than expected utilization rate (74% versus management’s guidance of 72% and 2Q2005’s 65%) as a result of stronger than expected loading from Microsoft Xbox game consoles (consumer segment contributions rose from 16% a quarter ago and 12% a year ago to 32% currently).
  
• This had resulted to a 24% contribution from the 90n and below technology node versus zero a quarter and year ago.
  
• Average selling price rose a better than expected 13% qoq to US$1,035 per wafer. Start up costs disappeared compared to US$8mln a quarter ago and US$11.6mln a year ago. �� Looking ahead, management expects the seasonal strength in 4Q2005 to further increase sales by 21- 25% qoq to US$384mln to US$394mln, average selling price to increase 5-10% and utilization rate to increase further to 77% to 81%, up from 74% last quarter. Gross profit is expected to almost double qoq to US$66mln to US$74mln, while bottom-line is expected to turnaround to US$5 - 15mln, up from a loss of US$34.5mln in 3Q2005.
  
• 4Q2005 expected net profit of US$5 - 15mln is better than consensus expectations of net profit US$1mln, while sales of US$384mln to US$394mln is also better than consensus expectations of US$350mln. This reflects the better than expected loadings from Microsoft as well as pricing environment.
  
• While the results and outlook are better than expected, we are concerned with their reliance on 1 customer (Microsoft) and 1 product (Xbox game console) for their growth and turnaround (of Fab 7). Management is actively trying to engage and qualify new customers for their Fab 7 and 90n technology nodes, but the success is still uncertain. The risk is going into the seasonally weaker 1Q2006, there could be a sharp drop off in sales and profits as a result of their heavy reliance on Microsoft Xbox game consoles.
  
• In the conference call this morning, while most analysts’ were impressed with the results and outlook, there were many questions about management’s strategy to cope with the expected sharp drop off in orders for Fab 7 in 1Q2006. Management indicated that there is a high probability of a drop off in demand in 1Q2006 from Microsoft’s Xbox orders, but it would depend on the sell through during the holiday period. Most of the new customers that are coming on stream for Fab 7 are only expected towards the end of 1Q2006 and early 2Q2006. Hence there is a high chance that CSM could move back into the red going into 1Q2006.
  
• At 95 cents per share, market cap is S$2.39bln, price to sales is 1.6x, price to book is 1.1x. This compares with TSMC’s 4.8x and 3.1x, UMC’s 2.8x and 1.3x and SMIC’s 2.6x and 1x. Historically the market has used price to book to value the foundries given the volatile earnings and sales momentum. At 1.1x book, CSM’s discount is in line with the historical discount versus TSMC (3.1x) and UMC (1.3x) and at a premium to SMIC’s 1x. CSM’s share price has also roughly tracked that of TSMC, UMC and SMIC.
  
• While the stock may trade higher in the short term given the better than expected results and outlook, we are maintaining our HOLD recommendation given the fair valuations relative to peers as well as heightened risks given CSM’s heavy reliance on Microsoft Xbox going into the seasonally weaker 1Q2006.