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Announcement:

Moody's changes Sharp's A2 rating outlook to negative

 The document has been translated in other languages

01 Nov 2010

Tokyo, November 01, 2010 -- Moody's Japan K.K. has changed to negative from stable its outlook for the A2 long-term debt ratings for Sharp Corporation (Sharp) and its supported subsidiaries, Sharp International Finance (UK) plc (SIF).

RATING RATIONALE

This outlook change reflects the growing uncertainty over whether Sharp can improve and stabilize the earnings from core businesses such as its liquid crystal display (LCD) panels while also lowering leverage.

Its LCD panel business, which comprises over 30% of consolidated sales, remains sluggish due to weak demand, greater competition from other Asian makers, and the strong yen. Previously, the business had an operating margin of more than 7%, but this has fallen to around 1% since FYE3/2009.

Moody's notes that Sharp had expected the operating margin of its LCD panel business to improve to 4.2% in FYE3/2011 -- the current fiscal year -- but in the second quarter, it lowered this target to 1.6% due largely to declines in sales of large LCD panels to external customers.

However, by way of offset, sales of LCD TVs, refrigerators, and air conditioners -- together about 30% of total consolidated sales -- have been quite strong so far in FYE3/2011 because of stimulus packages from the Japanese government.

As a result, Sharp is forecasting an increase in its consolidated operating margin to 2.9% in FYE03/2011, from 1.9% last year, despite the weak performance of its LCD panel business.

When looking at the medium term, however, Moody's notes that sales of consumer electronics products could decline significantly in Japan, a solid customer base for the company, when government policy support ends by March 2011.

A further negative influence is the weak pace of the economic recovery overseas, especially in developed countries.

Moody's sees strong potential in Sharp's solar business, but as it accounts for less than 10% of total sales or operating profit, it is unlikely to provide much support to earnings in the short term. And worldwide, competition in technology and for investment is also very strong in the solar business.

With its financial metrics, Sharp will need to lower leverage, but progress will be slow. Sharp's adjusted debt to book capitalization ratio has been over 50% since FYE03/2009, which is high for its A2 rating, and improving the balance sheet quickly without a substantial improvement in earnings will be difficult.

Moody's further notes that Sharp's stable relationships with its major banks are an important rating consideration, one that has lifted the ratings by two notches from the company's fundamental level of creditworthiness (similar to other leading Japanese companies).

The rating would be pressured downwards if the competitiveness and profitability of Sharp's core businesses, such as LCD panels, LCD TVs, and solar cells, suffered significant difficulties, increasing the volatility of overall profitability and hindering timely recovery of the balance sheet.

For instance, if Sharp cannot raise -- and keep -- its reported operating profit margin above 3.0%, or if it cannot decrease adjusted its debt to book capitalization significantly below 50%, the rating would be downgraded.

Any risky and large investments -- that could lead to increased leverage -- without alliances with leading companies could result in the same.

Near-term upward rating pressure is limited, given the negative outlook. But if Sharp can raise -- and stabilize -- its overall profitability -- by reinforcing the competitiveness and profitability of its core businesses -- while improving its balance sheet, the rating could be upwardly pressured.

For example, if the company can raise its reported operating margin to around 4% and lower its adjusted debt to book capitalization to below 45%, the rating outlook could be changed to stable.

The last rating action on Sharp took place on April 21, 2009, when Moody's downgraded to A2 from A1 the long-term debt ratings for Sharp and SIF.

The principal methodology used in this rating was Moody's "Asian Consumer Electronics," published on September 30, 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on www.moodys.co.jp.

Sharp Corporation, headquartered in Osaka, Japan, is a leading manufacturer of consumer electronics.

Tokyo
Yoshio Takahashi
Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan

Moody's changes Sharp's A2 rating outlook to negative
No Related Data.
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