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Rating Action:

Moody's downgrades Sharp to A2; outlook stable

21 Apr 2009

USD 700 million in long-term debt and Yen 500 billion and USD 900 million CP affected

Tokyo, April 21, 2009 -- Moody's Investors Service has downgraded to A2 from A1 the long term debt ratings for Sharp Corporation (Sharp) and its supported subsidiary, Sharp International Finance (UK) plc. (SIF). The short-term ratings for Sharp, SIF, and another supported subsidiary, Sharp Electronics Corporation, have been left unchanged at Prime-1. The outlook for the ratings is stable. This concludes the review initiated on February 13, 2009.

The downgrade reflects Moody's concern about the growing business risk associated with changes in demand trends and in the competitive environment for Sharp's major products. It also reflects Moody's expectation that the company will need some time to overcome the deterioration in profitability due to weakening demand.

Demand for Sharp's major electronics products, including LCD (liquid crystal display) TVs, has experienced a steep downturn since the onset of the global financial crisis, which has considerably hurt consumer confidence and led to very severe price competition. The company is now forecasting an operating loss of Yen 60 billion for FYE03/2009, due mainly to a significant drop in sales and adverse foreign exchange movements.

In light of Moody's expectation that the severe profit environment is going to persist for some time -- due to weakening demand, the downturn in product prices, and exchange fluctuations -- the rating agency expects downward pressure on Sharp's profitability to continue into FYE03/2010.

To restore profitability, Sharp has implemented measures to reduce excess inventory and cut costs, including the reorganization of its LCD panel plants and the reallocation of personnel. With these measures, the company is aiming for cost savings of about 200 billion yen in FYE03/2010. Moody's expects that the timely implementation of these measures will help Sharp recover its profitability. Moody's also notes that the economic stimulus measures of governments (especially those by the Chinese government) and inventory adjustments in the LCD panel market may have a positive impact in supporting Sharp's earnings.

However, the prospects for demand for electronics products remain uncertain due to global economic stagnation. Also, the structure of that demand may change significantly, in light of the maturing markets in developed countries and the rapid growth taking place in developing countries such as the BRICs.

Moody's notes that the LCD panel and solar cell businesses, which should be key drivers of growth as demand for these products is expected to expand, need up-front outlays for both R&D and production. To meet the mid- and long term growth demand for large LCD panels, Sharp is now constructing in the city of Sakai the most advanced plant ever, which will use 10th-generation LCD glass substrates. The company plans to start operations in October 2009. Although Moody's believes that, despite Sharp's ability to maintain its superiority in the technological development and production technology for these businesses, earnings fluctuations and payouts may be higher than in the past, given the significant changes in demand and in the competitive environment.

Sharp has also decided to promote a new business model, one that will allow it to seek further growth opportunities and better manage foreign exchange and investment risks. It aims to establish local production value chains in both the LCD panel and solar cell businesses by tying up with major local leaders. Sharp will provide the technological production support for these alliances but confine its most advanced technologies to Japan. In Moody's opinion, if the company can overcome the weaknesses in its current business model (which consists of investing heavily in its own plants in Japan and exporting overseas) and maintain its global competitiveness, Sharp's cash flow and profitability will stabilize in the mid- to long term.

Sharp's financials were adversely affected by the net loss as well as aggressive capital investment for FYE03/2009. Still, Moody's believes that, by improving free cash flow, the company will maintain its conservative financial policy and sustain moderate financial flexibility after FYE03/2010.

The last rating action for Sharp was on February 13, 2009, when the A1 senior unsecured long term debt and Prime-1 short-term ratings were placed under review for possible downgrade.

The principal methodology used in rating Sharp is "Asian Consumer Electronics" (January 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

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 downgrades Sharp to A2; outlook stable
No Related Data.
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