* Sony to post small Q2 operating profit on asset sale
* Sharp to forecast 450 bln yen FY net loss - sources
* Panasonic shares dive 19 pct, $3 bln wiped off mkt value
* Sony down 5 pct, Sharp down 2.3 pct ahead of earnings
By Tim Kelly
TOKYO, Nov 1 Sony Corp is likely to say
it returned to an operating profit for July-September after it
sold a chemicals business, but investors still aren't sure a
consumer electronics revamp will deliver the profit growth the
Sony shares, valued at less than $12 billion, have dropped
19 percent since end-June and its 5-year credit default swaps -
the cost of insuring against debt default - have jumped by
almost 60 percent. The benchmark Nikkei average
is down by less than 1 percent.
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 it'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
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.
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 - 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 it'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 - 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 there's a strong chance Sony, too, will opt for
writedowns," said Makoto Kikuchi, CEO fo Myojo Asset Management
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.
"It'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 Sony'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
The South Korean firm and Apple are also encroaching on
Sony'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, Sony's shareholder
equity ratio fell to below 15 percent - 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 - 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 Moody's and Standard &
Poor's to lower their long-term debt rating on the company to
the second-lowest investment grade.
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, Sharp'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 Japan'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
The bank loans may prove to be just a sticking plaster
rather than a salvation, said Myojo Asset's Kikuchi. "I don't
think Sharp has a future. Even if it gets by this term,
financial problems could emerge again next business year, and I
don'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.