Sony,Sharp in turnaround battle,Panasonic battered

The maker of Bravia TVs,Vaio laptops and PlayStation game consoles,battling weak demand and tough competition,is expected to say it earned operating profit of 33.8 billion yen 424.7 million in its second quarter,after losing 1.6 billion yen a year ago,according to an average estimate from five analysts on Thomson Reuters I/B/E/S.

The reality for Sony now is that it8217;s getting profit through financial accounting; beyond that,things are not good,said Tetsuro Ii,CEO of Commons Asset Management. The question is whether Sony can tell a growth story or not.

Sony has sold a chemicals unit to state-backed Development Bank of Japan for 58 billion yen,and other asset sales may further inflate operating profit this business year. The Japanese group,which blazed a trail in the early 1980s with its Walkman portable music players,is closing the Shinagawa Technology Center,a 31-storey Tokyo office built in 1998  and may even sell the 37-storey Sony Tower,the New York headquarters of its U.S. business,according to media reports.

Sony has said it expects to reduce its global workforce by 10,000 people by end-March,around 6 percent of its total,as it seeks to lop 30 billion yen off its costs.

HIGH-RISK

Kazuo Hirai,who took over as CEO in April,has pledged to rebuild Sony around gaming,digital imaging and mobile devices,and nurture new businesses such as medical devices,as the TV business shrinks 8211; Sony has lost close to 9 billion in TVs over the past 8 years. In late-September,Sony agreed to pay 50 billion yen to become the biggest shareholder in Olympus Corp ,a world leader in medical endoscopes.

The areas in which Sony is continuing to focus are of course high-risk,high-return markets,said JP Morgan analyst Yoshiharu Izumi in a recent report. Although we expect full-year margin improvement in the electronics segment,we think it8217;s too early to appraise a sustained recovery.

While battling weak demand for its products,fierce competition from Apple Inc and Samsung Electronics  and others,Sony is also up against a strong yen  and a depressed global economy.

Shares in rival Japanese TV maker Panasonic Corp  slumped by nearly a fifth on Thursday,wiping 3 billion off its market value,a day after it said it will lose almost 10 billion this business year as it cleans its house of risky assets 8211; writing down billions of dollars of goodwill and assets in its mobile and energy units and preparing for more restructuring that is likely to see it shift away from money-losing TVs and other consumer electronics.

It may not be on the same scale,but for the same reasons I think there8217;s a strong chance Sony,too,will opt for writedowns,said Makoto Kikuchi,CEO fo Myojo Asset Management in Tokyo.

OUTLOOK DIMMER

In August,Sony cut its full-year operating profit forecast by more than a quarter to 130 billion yen,still some way above the average forecast by 19 analysts for 107 billion yen. At a net level,Sony sees annual profit of 20 billion yen,while the market prediction is for around a third of that.

It8217;s unclear if Sony will cut its full-year operating profit guidance,but we see considerable potential for second-half shortfalls,mainly in smartphones and games,Goldman Sachs analyst Takashi Watanabe said in a client note.

Sales of Sony8217;s handsets,including its Xperia smartphones,are expected to have slid by more than a fifth in July-September,to below 8 million devices,a Reuters poll found last month. Next year it is forecast to sell 34.4 million mobiles,about the same as Samsung shifts each month.

The South Korean firm and Apple are also encroaching on Sony8217;s gaming business,and Hirai has cut the forecast for annual sales of the hand-held Vita and PSP consoles to 12 million from 16 million.

After four straight years of net losses,Hirai is also hampered by weakened finances. At end-June,Sony8217;s shareholder equity ratio fell to below 15 percent 8211; a rate of 20 percent is generally considered a healthy minimum.

While selling off non-core assets,Sony has also spent to bolster its business portfolio 8211; laying out 1.8 billion in four months on the Olympus stake,a cloud gaming firm and a website for doctors,but this has prompted both Moody8217;s and Standard amp; Poor8217;s to lower their long-term debt rating on the company to the second-lowest investment grade.

SHARP DOWNTURN

At rival Japanese TV maker Sharp Corp,which also announces quarterly earnings on Thursday,the need to return to profit is more urgent.

The maker of Aquos TVs has secured a 4.6 billion bank bailout,and has pledged to axe 10,000 jobs,sell assets,and return to profit. At end-June,Sharp8217;s shareholder equity ratio was 18.7 percent.

After adding restructuring charges,valuation losses on stocks of LCD display panels and other costs,Sharp will almost double its net loss forecast for the year to 450 billion yen,two sources familiar with the matter told Reuters. But Sharp will keep its forecast for an operating profit in the current second half,a turnaround that will let its banks justify their bailout of Japan8217;s TV pioneer. For July-September,Sharp is expected to have made a 50.4 billion yen operating loss,according to the average of six analysts on Thomson Reuters.

The bank loans may prove to be just a sticking plaster rather than a salvation,said Myojo Asset8217;s Kikuchi. I don8217;t think Sharp has a future. Even if it gets by this term,financial problems could emerge again next business year,and I don8217;t see the banks coming to the rescue.

Both Sharp and Sony may also have felt the impact of a recent dispute with China over ownership of islands in the East China Sea,which triggered sometimes violent protests against Japanese products. Sharp had almost a fifth of its revenues in China,while Sony has around 8 percent of its business there.

Sharp shares have more than halved since end-June,to record lows below 150 yen. Five years ago,the stock traded at above 2,440 yen. Its market value has slumped to below 2.4 billion.