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Fitch: Current Problems Delay, Not Derail, Sony's Turnaround
February 3, 2017 / 8:05 AM / 10 months ago

Fitch: Current Problems Delay, Not Derail, Sony's Turnaround

(The following statement was released by the rating agency) SEOUL/SYDNEY, February 03 (Fitch) Sony Corporation's (BB/Positive) strong commitment to increasing profitability through restructuring and cost-cutting will improve its credit profile over the medium to long term, although the struggling movie and smartphone businesses may delay Sony's recovery and overshadow its expanding semiconductor and solid gaming businesses in the short term, says Fitch Ratings. The company's theatrical revenue and operating profit has been declining due to the absence of blockbuster hits and a structural decline stemming from the increasing popularity of streaming services. Sony announced on 30 January 2017 a significant impairment loss of JPY112bn against the goodwill of its pictures segment, indicating that future cash flow will be lower than the company had expected and do not support the goodwill carrying value. The loss brings Sony's impairment charges for the nine months ending December 2016 (9MFY17) to JPY169bn, which include losses from its battery business and termination of its high-functionality camera module business for external customers. Sony's poor-performing smartphone and loss-making component business, which includes its battery and recording media segments, is also likely to be a major drag on the company's recovery in the short term. The company continues to restructure this segment after revenue fell by 36% in 9MFY17 on lower European sales, although operating profit turned positive. We expect the component segment to continue posting losses due to the weak business outlook for batteries. However, we still expect robust performance for Sony's gaming business, with strong PlayStation4 (PS4) hardware sales and accompanying software sales. Sony has sold more than 53 million PS4 consoles since the launch in November 2013, which is the fastest penetration in Sony's PlayStation history. Expanding software revenue and recurring subscription fees are also likely mitigate game segment volatility over the long term. Sony's game and network service revenue increased by 2.6% yoy in 9MFY17, operating profit climbed 35% yoy and its EBIT margin expanded to 8.9% from 6.8% a year earlier. In addition, Sony's market-leading high-end image sensor business continues to recover from supply disruption due to the Kumamoto earthquakes in 2016 and the termination of its camera module business for external customers. We expect image sensor demand to gradually increase to support the use of higher-resolution front cameras and dual rear-facing cameras in smartphones, especially in China. However, a global slowdown in demand growth for smartphones is likely to limit this segment's upside in the short term. Sony's revenue fell by 9% yoy to JPY5.7trn in 9MFY17 and operating profit decreased by 50% yoy to JPY194bn. Its EBIT margin, excluding Sony Financial Holdings, contracted to 1.7%, compared with 4.5% a year earlier. The company revised down its full-year operating profit forecast to JPY240bn from JPY270bn to reflect the impairment charges in its pictures segment. Contact: Shelley Jang Director +82 2 3278 8370 Fitch Ratings Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeoungdeungpo-Gu Seoul, Republic of Korea Steve Durose Managing Director +61 2 8256 0307 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. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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