September 18, 2014 / 2:31 AM / 3 years ago

Fitch: Sony's USD1.7bn Write-Down Highlights Weakness in Mobiles

(The following statement was released by the rating agency) HONG KONG/SYDNEY/SINGAPORE, September 17 (Fitch) Sony's (BB-/Negative) JPY180bn (USD1.65bn) write-down in its mobile communications business comes as no surprise, and is not likely to affect the credit rating, says Fitch Ratings. Our assumptions about Sony's mobile business profitability and cash generation have been consistently lower than those of management, given the competitive nature of the smartphone market and Sony's struggle to achieve the scale required for this business to be a success. Sony's revisions to its forecast cash flow indicate that it now believes that the mobile communication segment's valuation does not support goodwill which has a carrying value of JPY180m. As a result, the company has reviewed its smartphone strategy, and will now target more niche consumer segments. We think the revised strategy to focus on premium mobile products in certain markets is more sound than trying to compete strongly in the mid-range smartphone market. However, lack of scale means that it will struggle against the big two, Apple and Samsung (A+/Stable), and will also face competition in the premium market from LG Electronics (BBB-/Stable), HTC and Nokia. In addition, the premium market is under threat from lower-cost Chinese manufacturers such as Lenovo, Huawei and Xiaomi, whose product design, build quality and functionality is improving to a level which may threaten the premium market in the longer term. These businesses will have to invest significantly in their brands before they represent a significant challenge to the big two in the premium market. Nevertheless, their growing strength in the low- and mid-market is leading to a narrowing in margins for all competitors. According to International Data Corporation, Sony's share of the smartphone market declined to 3.1% in the year to June 2014 (June 2013: 4.0%). In contrast Huawei's share rose to 6.7% from 4.3%, Lenovo to 5.2% from 4.7%, and Xiaomi to 4.6% from 1.7%. The write-down supports our long-held view that mobile phones are unlikely to be a key element in Sony's recovery, and our rating assumes continued weak performance in this segment. However, credit markets were surprised by the announcement, with five-year CDS prices spiking up to 142bp from 112bp, according to Bloomberg, despite the positive news for creditors that the company will not be paying a dividend this year. Management's resolve to make difficult decisions will be tested if performance in the mobile business does not improve. Apart from PCs, the company continues to produce the same products as five years ago, and we believe that more aggressive reform to revamp Sony's product and business portfolio is overdue. For example, the company appears committed to turning around its TV business following 10 straight years of losses. We rate Sony's chance of meeting its break-even target for TVs in the year ending March 2015 (FYE15) at no greater than 50%. Contact: Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Steve Durose Senior Director Deputy Head Asia-Pacific Corporate Ratings Group +61 2 8256 0307 Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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