- Sharp's profitability has significantly worsened and faces higher volatility because of the return of the large LCD panel business to its portfolio.
- Cash flow is likely to recover only moderately, meaning related metrics should remain deteriorated in the next one to two years.
- We lowered our long-term rating on Sharp by one notch to 'B+' and affirmed our short-term rating at 'B'.
- The negative outlook reflects our view that any recovery of performance for Sharp, especially in the large LCD panel business, is likely to be weak.
TOKYO (S&P Global Ratings) June 9, 2023--S&P Global Ratings today said that it has lowered to 'B+' from 'BB-' its long-term issuer credit rating on Sharp Corp. The outlook on the Japan-based electronics maker is negative. Meanwhile, we affirmed our 'B' short-term issuer credit and commercial paper program ratings. At the same time, we took similar actions on an overseas Sharp subsidiary (see the list below).
We downgraded Sharp because we believe it is likely that the return of the large liquid-crystal display (LCDs) panel business to the company's business portfolio will weaken its profitability materially for now and potentially increase its volatility going forward. The downgrade also reflects our view that any recovery in cash flow will be moderate, meaning related ratios will likely remain deteriorated in the next one to two years.
Sharp's business structure is likely to remain more sensitive to the external environment. In the LCD business, the company reconsolidated Sakai Display Products Corp. This has weakened stability of earnings materially. The LCD business, including Sakai Display, posted an operating loss of ¥66.4 billion in fiscal 2022 (ended March 31, 2023). This loss was far beyond our previous assumptions. We estimate that more than half of the loss is attributable to Sakai Display, which was severely hit by the fall in the price of large LCD panels. Despite signs of a moderate recovery of the large LCD panel prices, a full-scale recovery of earnings for the LCD business looks unlikely to us. This is because demand is rapidly shifting from LCD to organic light emitting displays (OLEDs).
We expect Sharp's companywide profit to recover only moderately in the coming year. Relatively stable profits from white goods home appliances have mitigated volatility in the LCD business. However, profit from the home appliance business is likely to recover only moderately. Demand for products in this business was pushed forward during the COVID-19 pandemic. In addition, ongoing weakness in the yen is likely to depress profits. This is because a large proportion of the company's home appliances and other products are manufactured overseas and sold in Japan. The company has taken steps to transform its business structure. These include adjusting its use of Sakai Display's panel factories and increasing overseas sales of home appliances. In addition, it is raising prices and cutting costs. However, any impactful transformation and material recovery for profits will take time, in our view.
We forecast the company's key cash flow ratios will stay at a weakened level in the next year or so. We estimate that the company's debt-to-EBITDA ratio rose above 14x as of the end of fiscal 2022. A material decrease in operating cash flow in the wake of worsened performance pushed up the ratio, in our view. We expect the company to tighten control of working capital and conduct investments in a selective manner. However, profit is likely to recover only moderately and free cash flow will remain weak in the current fiscal year. Accordingly, we anticipate the company's ratio of debt to EBITDA to recover only to around 6x as of the end of this fiscal year. Moreover, after a significant worsening in the company's capital at the end of fiscal 2022 when it booked a huge net loss, we do not expect to see much improvement for now.
We have revised down our evaluation of the company's liquidity to less than adequate from adequate. This is for two main reasons. First, we think any profit recovery will remain sluggish. Second, we believe the company needs to continue monitoring for further issues related to its going concerns over the next year or so. We estimate Sharp's sources of liquidity are about 1.5x as much as liquidity uses for the next 12 months. The company has relatively ample cash at hand and its dependence on short-term debt is low. It also has a commitment credit facility of ¥200 billion in total with its two major creditor banks, Mizuho Bank Ltd. and MUFG Bank Ltd. This should support the company's cash management over the short term. Having said that, we believe that the company's funding could be somewhat weakened. Sharp discloses information on important events relating to going concerns. It concluded there was no need to consider these going concerns to have seen important events when it announced financial results for fiscal 2022.
We incorporate into our long-term issuer credit rating on Sharp a notch of uplift from the company's stand-alone credit profile (SACP). This is because of the support of parent Hon Hai Precision Industry Co. Ltd. (Foxconn; A-/Stable/--). Hon Hai has higher creditworthiness than Sharp. We believe the Taiwan-based company would support Sharp if the subsidiary's finances weakened substantially. However, the likelihood of Hon Hai's financial support to Sharp may weaken in the future due to the company's large net loss in the previous fiscal year.
The negative outlook reflects our view that Sharp's performance and cash flow will become more susceptible to changes in the external environment. This is because, amid a difficult business environment, a material and early recovery of profit is unlikely at Sakai Display, which carries the largest business risk among Sharp's businesses, in our view.
We may consider a downgrade if we see a heightened likelihood of either of the following in the next six to 12 months:
- Sharp's debt-to-EBITDA ratio exceeds 7x and stays there. This could occur if full-scale reform at Sakai Display does not proceed, and the recovery of profit and cash flow is delayed.
- Hon Hai's financial support to Sharp weakens.
- Banks become less supportive and Sharp's funding capability weakens.
Conversely, we may revise the outlook up to stable if we see a heightened likelihood of both of the following:
- The company's debt-to-EBITDA ratio improves to below 5.5x and remains there. This could occur if companywide profit and cash flow recover materially thanks to a drastic reform of Sakai Display and the recovery of performance of other businesses.
- We consider the likelihood of Hon Hai's financial support to Sharp and supportive stance of banks are unchanged.
ESG credit indicators: To: E-2, S-2, G-4; From: E-2, S-2, G-3
Governance factors are now a negative consideration in our credit analysis of Sharp. They were slightly negative previously. This is because its risk management standards and operational effectiveness are now weaker than those of regional peers. The considerably negative impact of reconsolidation of Sakai Display on management and business performance drove this deterioration.
Ratings Score Snapshot
Issuer credit rating: B+/Negative/B
Business risk: Weak
- Country risk: Intermediate risk
- Industry risk: Moderately high risk
- Competitive position: Weak
Financial risk: Highly leveraged
- Cash flow/Leverage: Highly leveraged
Anchor: b
Modifiers:
- Diversification/Portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Financial policy: Neutral (no impact)
- Liquidity: Less than adequate (no impact)
- Management and governance: Fair (no impact)
- Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile: b
Group credit profile: a-
Entity status within group: Moderately strategic
Related Criteria
- Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Group Rating Methodology, July 1, 2019
- Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Methodology: Industry Risk, Nov. 19, 2013
- Corporate Methodology, Nov. 19, 2013
- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
Ratings List | ||
---|---|---|
Downgraded; Outlook Action; Ratings Affirmed | ||
To | From | |
Sharp Corp. |
||
Issuer Credit Rating | B+/Negative/B | BB-/Negative/B |
Sharp International Finance (U.K.) PLC |
||
Issuer Credit Rating | B+/Negative/B | BB-/Negative/B |
Ratings Affirmed | ||
Sharp Corp. | ||
Sharp International Finance (U.K.) PLC | ||
Commercial Paper | B |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
Primary Credit Analyst: | Kei Ishikawa, Tokyo + 81 3 4550 8769; kei.ishikawa@spglobal.com |
Secondary Contact: | Makiko Yoshimura, Tokyo (81) 3-4550-8368; makiko.yoshimura@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.