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Announcement:

Moody's comments on Sony's 1H2012 results

 The document has been translated in other languages

Global Credit Research - 02 Nov 2012

Hong Kong, November 02, 2012 -- Moody's Investors Service says that weak economic conditions and structural changes continue to pressure earnings from Sony Corporation's (Baa2/Prime-2, negative) electronics business, following the announcement of its 1H2012 financial results.

On 1 November, 2012, Sony announced that its consolidated operating profit for 1H2012 was JPY66.2 billion with an operating margin of about 2%, excluding equity losses and non-recurring expenses.

According to the company, its 1H2012 results exceeded its targets thanks to the better-than-expected performance in its TVs and devices businesses.

Thus, the company maintained its FYE3/2013 consolidated operating profit forecast of JPY220 billion with an operating margin of over 3%, despite the expectation of weak demand and the possibility of downward revisions of its financial forecasts in 2H2012, in Moody's view.

In this context, Moody's remains concerned over Sony's financial performance.

In Moody's estimation, the operating margin for its non-financial services businesses for 1H2012 stayed at roughly break-even, or even slightly below if one-time gains from insurance and the sales of various businesses are excluded.

Moody's concerns center on the company's Mobile Products and Communications, and Home Entertainment and Sound Segments. The challenges in these segments continue to offset the acceptable performances posted by the segments for Imaging Products and Solutions, Music, and Pictures.

Operating losses in its TVs business have declined but remain large and of concern. Continued and increasingly rapid progress in turning around or exiting this segment would be an important factor for maintaining the current rating.

Of similar concern are the continued large operating losses apparent in the mobile phones business. Losses in the recent quarter have been magnified by Sony's purchase of Telefonaktiebolaget LM Ericsson's (A3/stable) (*) stake in their joint venture, Sony Ericsson Communications AB (unrated). Sony started to record the amortization costs of intangible assets and loyalty fees.

(*: This Moody's Investors Service's rating is not governed by Japanese regulation.)

Moody's notes an improvement in the operating results of this segment in 2Q2012 on a quarterly basis. Nevertheless, in Moody's opinion, it will be a challenge to achieve acceptable returns in the mobile phones business, in view of the company's current weak position.

At the same time, the increasing popularity of smartphones continues to pressure sales and earnings from compact digital cameras in the Imaging Products and Solutions segment and portable game consoles in the Game segment. Weak consumer sentiment could also lead to disappointing sales in its electronics products in the peak season which is 3Q2012.

Moody's also notes the company's balance sheet has weakened. Sony maintains a good liquidity profile with cash and deposits of about JPY420 billion and about JPY770 billion in unused commitment lines and the holding of a listed financial subsidiary (the current market value of Sony's share is over JPY350 billion) against about JPY400 billion in short-term debt as of September 2012 in its non-financial services businesses.

However, cash and deposits decreased to about JPY420 billion in September 2012 from about JPY720 billion in March 2012 and gross debt for its non-financial services businesses increased to about JPY1.25 trillion from JPY1.15 trillion due to weak operating cash flow. In the near term, given weak earnings, the company is not expected to reduce debt significantly without cutting capex or implementing the sale of non-core assets.

In FYE03/2012, Sony's reported operating margin, excluding equity income and non-recurring expenses, was break-even and adjusted debt/EBITDA was over 5x in its non-financial services businesses. Its financial metrics weakened last year in part because of the earthquake and floods in Thailand.

If a substantial improvement in profitability and leverage looks unlikely in 2H2012, its ratings will be reviewed for further downgrade in a relatively short time, given volatile market conditions. Moody's downgraded Sony's ratings to Baa2 with a negative outlook from Baa1 on 12 October 2012.

Please see ratings tab on the issuer/entity page on the Moody's website for the last rating action and the rating history.

The principal methodology used in this rating was Moody's "Asian Consumer Electronics" published on 6 January 2011, and available on www.moodys.co.jp.

Sony Corporation, headquartered in Tokyo, is one of the world's leading manufacturers of consumer electronics products.

Yoshio Takahashi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Richard C Bittenbender
Associate Managing Director
Corporate Finance Group
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SUBSCRIBERS: (03) 5408-4100

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's comments on Sony's 1H2012 results
No Related Data.

 

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