I have been an armchair critic of Chartered Semiconductor for many years. But it's been a while since I looked at the stock in great detail, so when they released 2007 earnings this morning I wanted to check on how things had improved. If at all.

From the outset I want to point out that I don't have an inherent bias against the company. On the contrary. Their transparency and disclosure have improved markedly since the PR disaster of a rights issue a few years ago. Recall, the company had denied for weeks rumours it was going to have a steeply-discounted rights issue, only to then announce one. It took a visit to the offices of the Securities Investors' Association (Singapore) to straighten that one out.

Conducting an interview with CEO Chia Soon Hwee for CNBC more than two years ago, I witnessed an incredible fighting spirit in a sector where the profit margins are so thin one could measure them in microns, just like the silicon wafers it produces. When I visited their headquarters in Ang Mo Kio I got a real sense this company was going places. They ought to be congratulated for sticking it out against all odds and commercial sense.

So, should I stop being an armchair critic?

Let's look at the evidence:

1. Candid assessment of the situation. I like that Chartered calls a spade a spade. No sugar coating of difficult times. Top marks for telling it like it is.

2. Specific guidance. Most SGX-listed companies could learn a lot from the very specific guidance Chartered gives. Clearly this is because Chartered is also Nasdaq listed, and US investors expect this. But whatever the motivation, their fairly precise guidance is a huge improvement on the lame-duck "barring unforeseen circumstances, we expect to still be breathing next year"-type of guidance most SGX-listed companies provide.

3. Lots of numbers, but what do they mean? You can see the numbers for yourself – revenue down 4.2%, profit boosted substantially by a tax credit. But to what extent are they a true reflection of the company's financial health?

4. The numbers that really matter. You have to turn to the last page of the earnings document to get those: page 17.

• Cash from business operations: positive cashflow of US$521 mln compared to US$479 mln last year.
• Cash from buying and selling equipment (investing): negative cashflow of US$420 mln compared to cash outflow of US$845 mln.
• Cash from going to the bank to get and repay loans (financing): negative cashflow of US$205 mln compared to positive cashflow of US$386 mln last year.

Bottom line: they had US$100.8 mln more cash flow out of the company than they had coming in.

Their cash and equivalents (=loans, overdrafts, term deposits, etc) balance dropped to US$719 mln. In other words, the company has a pulse, but it's still bleeding.

And yet, among Average Selling Prices, Capacity Utilisation and all those other metrics, there's nary a mention of cashflow in the rest of the document. While blinding me with all sorts of details, there is not enough emphasis on the numbers that really matter.

I think I will remain an armchair critic a little longer.


Mark Laudi, who would really like to see them generate more cash than they have to spend or invest, so their profitability promises don't ring so hollow.

To comment on this blog, go to the Investor Central blog.

Labels: cashflow, Chartered Semiconductor