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Fitch: Sony's Turnaround Plan a Long Haul

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Fitch Ratings says Sony's bid to achieve a significant turnaround in its electronics business in the financial year ending March 2014 (FYE14) will be a challenge. Nevertheless, if successful, Sony's EBIT margins and funds flow from operations (FFO) adjusted leverage would approach Fitch's positive rating action guidelines.

Although Sony has had some success in increasing its smartphone market share, albeit from a low level, and in reducing costs in its TV business, Fitch believes the company's FYE14 electronics business operating profit target of JPY100bn is ambitious. The TV and smartphone markets will remain competitive and stronger rivals, such as Samsung Electronics, LG Electronics and Apple, present a significant challenge to Sony's goal of increasing both profit and market share in these segments.

Sony's TV business may struggle to meet its goal of increasing sales volume by 19% yoy and becoming profitable. Its smartphone segment's targets of 42 million units sales and tens of billions of yen profit in FYE14 would match LG Electronics' current share and profitability. This turnaround from the heavily loss-making position in FYE13 faces headwinds of a small market share in a competitive segment.

Fitch is not convinced that Sony's strategy to curb losses in the computing business by introducing high value-added PCs will be a success, particularly as weak economies in developed countries have extended the PC replacement cycle. Fitch believes that the PC market will continue to be tough for all operators following a 14% yoy worldwide PC shipment fall in Q113 due to substitution by smartphones and tablets and the lukewarm response to Window 8-based products.

Although the weakening of the yen is positive for Sony - the company expects a positive foreign exchange impact of JPY60bn in FYE14 - this by itself will be insufficient to return the company to investment-grade. Regaining investment-grade ratings would require Sony to reclaim technology leadership in key products and further capitalise on its brand, for which there remains significant residual consumer affection.

As previously stated, the launch of the PlayStation 4 will not generate sufficient cash flow to turn around Sony's credit profile in FYE14 as higher hardware sales will be offset by a substantial increase in research and development and marketing expenses.

Fitch may downgrade the rating if Sony's EBIT loss sustains and FFO-adjusted leverage rises above 4.5x (both excluding Sony Financial Holdings - SFH). However, Fitch will consider revising the Outlook to Stable if EBIT margins improve to over 1% and FFO-adjusted leverage is sustained below 4x, both excluding SFH.

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Tags: fitch ratings  sony  Japan