Source: Yahoo.com

SINGAPORE (Dow Jones)--As consumers grab game console Xbox360 off the shelves this Christmas, they're also likely adding value to shares of Chartered Semiconductor Manufacturing Ltd.(C27.SG), a foundry supplier for a major chip that goes into the product.

On the back of strong demand for Microsoft's next-generation game console during its North America launch on Nov. 22, analysts are now seeing healthy demand through 2006 for the central processing unit chips partlyproduced at the world's fourth-largest contract chip maker.

The Xbox360 may just be the boost Chartered needs after posting four consecutive quarters of losses. Positive signs already surfaced as early as in the third quarter ended Sept. 30, when the foundry surprised the market by reporting a smaller-than-expected net loss and forecasting a net profit for the fourth quarter - driven by wafer shipments for the Xbox360 CPU chips.

Together with major customer International Business Machines Corp. (IBM), Chartered is a foundry supplier for the Xbox360 CPU chips. The 90 nanometer wafers are produced at its newest fabrication plant, Fab 7, in Singapore.

Microsoft has said it targets to sell 3 million units of Xbox360 within the first three months and 10 million units by the end of the first year.

Goldman Sachs said in a recent report that Chartered seems to be the largest upstream beneficiary of the strong demand for the game console.

Goldman analyst Laura Conigliaro said IBM may be supply-constrained, pointing out that Chartered was ramping up wafer production for Xbox from about 4,000 wafers per month in June to 10,000 wafers per month in the fourth quarter ending Dec. 31.

In October, the company said it was keeping its Fab 7 target of 9,000 wafer shipments per month by year-end, and 15,000 by the third quarter next year.

DBS Vickers' analyst Don See said that the planned launch of the Xbox360 in Europe and Japan over the next two months will also lend momentum to gains in Chartered's share price.

"There is more upside to the share price and we are expecting upward revision to its current quarter guidance," said See, who has a one-year target price of S$1.59.

The company, which is 60%-owned by the Singapore government, said it expects to post fourth-quarter net profit of US$5 million to US$15 million. Revenue is expected at US$384 million to US$394 million.

The company is expected to issue a mid-quarter update on Dec. 9.

Macquarie Research also sees about a 20% upside from the stock's current price, pegging its target price at S$1.50.

Chartered closed up 4.2% Wednesday at S$1.24. Over the last four months, the stock has lost about 14% - underperforming the broader index, which is down 0.8% over the same period.

Chartered is trading at 1.3 times price-to-book value, on par with Taiwan rival United Microelectronics Corp. (2303.TW), but at a premium to China's Semiconductor Manufacturing International Corp.'s (0981.HK) 0.9 times price-to-book.

    Closing Technology Gap

Following Chartered's better-than-expected third quarter results, several analysts have revised their earnings forecast for 2005-2006.

Kim Eng Securities cut its fiscal year 2005 loss forecast to US$176 million from US$230 million, and is now projecting a net profit of US$24 million, instead of a loss of US$48 million in the next year.

Third-quarter revenue at Chartered was mainly driven by 90-nanometer wafer shipments in preparation for the Xbox360 launch.

These shipments accounted for 24% of total revenue during the three months and are expected to rise to 27% for the fourth quarter, Chartered said last month.

Goldman Sachs expects Xbox360 sales to represent 26% of Chartered's total revenue in the second half ending Dec. 31 and 15% for 2006. Also, analysts say customer shipments of microprocessor chips at Chartered are targeted to start by late second quarter and graphic chips by second half 2006, padding the growth driven by the CPU chips.

Merrill Lynch semiconductor analyst Daniel Heyler said the Xbox360 launch would be positive for Chartered's share price over the next six months at least.

In a report published late October, Merrill had a target price of S$1.19, which Heyler said was more on a conservative side, factoring only the initial ramp for the product launch.

Last month, analysts raised concerns that wafer production for IBM at Fab 7 could be ahead of demand, with some saying profitability may be difficult to maintain going into the first quarter of 2006, given the seasonal weakness and an expected slowdown at Fab 7.

But the successful launch of the Xbox360 has eased these concerns. Based on Microsoft's 12-month target of 10 million units in sales, IBM and Chartered should have a pipeline of about 2 million to 3 million CPU chips in orders every quarter, said Daiwa Institute of Research analyst Pranab Sarmah.

He added that should Microsoft place new orders in December, this would be positive for Chartered's share price over the next six months.

"There's also been some talk that Sony's Playstation 3 launch may be delayed to maybe June or July, which is good for Xbox360 because it would give it more time to gain market share," he said.

Analysts say collaborative effort with IBM is paying off for Chartered - providing it with the platform to get up to speed in the technology curve.

"The relationship has provided the technology roadmap and initial scale and it's been a very important step for Chartered," Merrill's Heyler said.

"It's definitely closing the technology gap, what's important is for Chartered to close the profitability gap," he said, noting that long term investors would be looking at consistency and profitability.

Chartered's Chief Executive Chia Song Hwee told Dow Jones Newswires that ongoing collaborative efforts would help bring down costs as it advances in terms of technology.

"We believe that the common platform collaboration - involving Chartered, Infineon, IBM and Samsung - will continue to enable the companies to realize significant economical and technological advantages by pooling resources and broad expertise," he said.

Chartered also counts Samsung Electronics Co. (005930.SE) and Infineon Technologies AG (IFX) as partners in a joint technology development program.

Chartered announced two weeks ago that it won a deal to produce 65-nanometer logic chips for Infineon Technologies AG (IFX), making the German company its first customer for the new technology platform.