Fitch Takes Negative Rating Actions on Japanese Tech Companies

Further to the release issued earlier this week on the back of an Asia-Pacific Technology sector-wide review, Fitch Ratings has taken negative rating actions on six major Japanese Technology Companies - Panasonic Corporation, Sharp Corporation, Hitachi, Ltd., Sony Corporation, NEC Corporation and Toshiba Corporation. These actions include one to three notch downgrades of the Long-term Issuer Default ratings (IDR) for all six companies, an Outlook revision to Negative in the case of NEC, and either maintaining or placing the remaining five companies on Rating Watch Negative (RWN). Details of the revised ratings for the six Japanese entities and rationale for the same are given below, together with a complete list of rating actions which Fitch has simultaneously taken on 17 rated technology names across Asia-Pacific is provided at the end of this press release Overall, the rating actions reflect Fitch's view that the recent poor operating and financial performance of these Japanese technology companies, as evident by their Q3FY2008 results, is likely to continue during FY2009 and possibly FY2010. Across the six companies, Q3FY2008 revenues declined on average, by 17% yoy, and the average EBITDAR margin declined to 4.3% from 10.5% compared with the prior year period. Notably, operating income turned negative for all six companies with the exception of Panasonic, with the average operating profit margin falling to -2.6% in Q3FY2008, compared with 4.6% yoy. In Fitch's view, these six export-oriented companies have been adversely impacted by the combined forces of the global economic slowdown and the strong Japanese Yen. These six companies are likely to witness further deterioration in operating performance, in light of recent economic data revealing a 45%-47% yoy decline in Japanese exports during January and initial data based on the first 20 days of February. Fitch expects the economic turmoil currently affecting Japan and its major export markets will be protracted, lasting for the next 18 months. "2008's supply-side problem of over-capacity in major technology sub-sectors, including semiconductors and display panels, has now been compounded as corporations and consumers' ability to buy or upgrade various electronic products has collapsed in consequence of the global financial crises and the negative GDP growth currently evident in both Japan and its major export markets," notes Matt Jamieson, Senior Director and Head of Fitch's Asia Pacific Telecommunications, Media and Technology team. "Moreover, the problems facing the Japanese exporters have been accentuated by the appreciation of the Japanese Yen, which has afforded an opportunity for competing technology companies in other countries, particularly Korea, to take a greater share of the reduced level of demand," adds Mr. Jamieson. The agency notes that unlike the auto industry, Japanese electronic products do not enjoy a significant brand premium above Korean or Taiwanese products. As potential cost reductions are unlikely to materially offset the impact of collapsing demand, the agency expects FCF generation and financial leverage of the six Japanese companies to deteriorate during FY2009. Further negative rating actions could be triggered by ongoing negative free cash flow generation resulting from continuing weak profitability, higher borrowings, increased capex and larger dividend payouts. Panasonic Corporation: - Long-term foreign currency (FC) and local currency (LC) IDRs downgraded to 'A+' from 'AA-' (AA minus); RWN maintained; - Short-term FC and LC IDRs downgraded to 'F1' from 'F1+'; RWN removed; and - Senior unsecured notes downgraded to 'A+' from 'AA-' (AA minus). The downgrades of Panasonic's Long-term and Short-term ratings reflect its weak operating and financial performance in recent quarters, its more pessimistic forecast for the fiscal year ending March 2009 and Fitch's expectation of the company's likely weaker performance in the next two fiscal years. Mainly due to the appreciation of the Japanese Yen, sluggish consumer spending and intensified price competition, Panasonic's profitability declined substantially for the quarter to end-December 2008, with its quarterly revenue falling 19.8% yoy, EBITDA margin decreasing to 6.2% from 10.4% a year ago, and operating profit plunging to JPY26.4bn from JPY165.4bn a year earlier. Panasonic has revised its financial forecast for the fiscal year ending March 2009, projecting JPY7,750bn revenues, JPY60bn operating profit and JPY380bn net loss. Panasonic's ratings remain on RWN in view of the proposed capital and business alliance between Panasonic and Sanyo Electric, under which Sanyo is likely to become a subsidiary. The RWN will be resolved by Fitch's assessment of the potential consolidation synergies and impact on Panasonic's financial condition as a result of the combination of the two entities' operations. The extent of a negative action on the IDRs (if any) will depend, among other factors, on the acquisition cost and the transaction structure. Sharp Corporation: - Long-term FC and LC IDRs downgraded to 'A' from 'A+'; Placed on RWN; - Short-term FC and LC IDRs affirmed at 'F1'; Placed on RWN; and - Senior unsecured notes downgraded to 'A' from 'A+'. The downgrade of Sharp's Long-term IDR reflects its deteriorated operating and financial performance in recent quarters, revised forecast for the fiscal year to end-March 2009 and the company's likely weaker performance in the following two fiscal years. Mainly due to sluggish private consumption, intensified price competition and the appreciation of the Japanese Yen, Sharp incurred an operating loss of JPY15.9bn for the quarter to end-December 2008 when its quarterly sales plunged by 20.2% yoy and EBITDA margin fell to 8.7% from 12.7% a year ago. In view of its recent weak quarterly result and the highly challenging outlook reflecting muted demand as a consequence of the global recession, Sharp has revised its financial forecast for the current fiscal year, projecting JPY2,900bn revenues, JPY30bn operating loss and JPY100bn net loss. The resolution of the RWN will reflect the potential for further negative rating actions as Fitch assesses the future credit profile of this company in the context of ongoing adverse economic conditions. Specifically the agency will closely consider Sharp's operating result for the current fiscal year, and may further downgrade the company if its leverage as measured by adjusted net debt to EBITDAR rises above 2.4x. Hitachi, Ltd: - Long-term FC and LC IDRs downgraded to 'BBB+' from 'A-' (A minus); Placed on RWN; - Short Term FC and LC IDRs affirmed at 'F2'; Placed on RWN; and - Senior unsecured notes downgraded to 'BBB+' from 'A-' (A minus). The downgrade of Hitachi's Long-term IDRs reflects its weak operational and financial performance in recent quarters, the downward revision to its forecast for the fiscal year ending 31 March 2009, and Fitch's expectation of the company's likely weaker performance in the following two fiscal years. Mainly due to the appreciation of the Japanese Yen as well as rapidly falling demand for automobiles, semiconductors, and industrial equipment, Hitachi incurred an operating loss of JPY14.5bn for the quarter, with sales declining by 16.5% yoy and EBITDA margin down to 5.0% from 8.2% relative to the same period a year earlier. Hitachi's Power & Industrial Systems and Digital Media & Consumer Products incurred operating losses of JPY25.4bn and JPY16.1bn, respectively, in Q3FY08. In view of this very weak quarterly result and the extremely challenging outlook for the sector - reflecting much weaker demand as a result of the global recession - Hitachi has revised downwards its financial forecast for the current fiscal year and now estimates JPY10,200bn in revenues, JPY40bn in operating income and a JPY700bn net loss. The resolution of the RWN reflects the potential for further negative rating actions as Fitch assesses the future credit profile of this company in the context of ongoing adverse economic conditions. Specifically the agency will closely consider Hitachi's operating result for the fiscal year ended 31 March 2009, and may take further negative rating action if Hitachi's financial leverage, as measured by adjusted net debt to EBITDAR rises above 3.8x. Sony Corporation: - Long-term FC and LC IDRs downgraded to 'BBB+' from 'A-' (A minus); RWN maintained; - Short-term FC and LC IDRs affirmed at 'F2'; Placed on RWN; and - Senior unsecured notes downgraded to 'BBB+' from 'A-' (A minus). The downgrade of Sony's Long-term IDRs reflects its deteriorated operating and financial performance in recent quarters, the downward revision to its forecast for the fiscal year ended 31 March 2009 and Fitch's expectation of the company's likely weaker performance in the following two fiscal years. Due to the appreciation of the Japanese Yen, the slowdown of global economy and intensified price competition, Sony incurred an operating loss of JPY18.0bn for the quarter, with sales falling by 12.0% yoy and EBITDA margin declining to 5.9% from 14.9% compared to the same period a year earlier. While Sony's Electronics division incurred a quarterly operating loss of JPY15.9bn, the operating income of Sony's Gaming unit fell to a negligible JPY0.4bn from JPY12.9bn a year ago. In view of this weak quarterly result and the poor trading outlook reflecting weakened demand as a consequence of the global recession, Sony has revised its financial forecast for the current fiscal year. The company is now projecting JPY7,700bn revenues, JPY260bn operating loss and JPY150bn net loss. The resolution of the RWN reflects the potential for further negative rating actions as Fitch assesses the future credit profile of this company in the context of ongoing adverse economic conditions. Specifically the agency will closely consider Sony's operating result for the quarter to end-March 2009, and may take further negative rating actions if Sony's financial leverage as measured by adjusted net debt to EBITDAR rises above 3.8x for the year ended 31 March 2009. NEC Corporation: - Long-term FC and LC IDRs downgraded to 'BBB-' (BBB minus) from 'BBB'; Outlook revised to Negative from Stable; - Short-term FC and LC IDRs downgraded to 'F3' from 'F2'; and - Senior unsecured notes downgraded to 'BBB-' (BBB minus) from 'BBB'; The downgrade of NEC's Long-term IDRs and the revision of the Outlook to Negative mainly reflects the recent poor operating and financial performance of NEC which, in Fitch's view, is likely to continue during FY2009 and possibly FY2010. NEC's Q3FY2008 revenues declined by 9.9% yoy, and the operating profit margin declined to -2.6% from 1.5% in the same period a year earlier. In reaction to its weakened operating performance, NEC recently revised its forecast for the fiscal year ending March 2008, and now expects consolidated sales to decrease to JPY4.2trn from its previous forecast of JPY4.6trn. NEC also lowered its earnings forecast substantially to an operating loss of JPY30bn from its previous forecast of a JPY120bn operating profit. Fitch believes that compared to other Japanese technology names, NEC is better protected from the current rapidly declining global economy thanks to its considerable exposure to the relatively stable domestic telecommunication industry as a network equipment provider. However, at the same time the agency expects that the profitable IT/NW business division's operating income will not be enough to offset the losses of other divisions, especially the potential losses of the Electronic Devices (semiconductor) business which reported an operating loss of JPY 20.2bn and was responsible for the large majority of NEC's total consolidated loss during Q3FY2008. Given NEC's intrinsically low profit margin, Fitch views it as unlikely that the company will recover its profitability and financial health within a short period of time. Fitch may take further negative rating action if the current negative EBIT margins continue on a quarterly basis. Toshiba Corporation: - Long-term FC and LC IDRs downgraded to 'BB' from 'BBB'; RWN assigned; - Short-term FC and LC IDRs downgraded to 'B' from 'F2'; and - Senior unsecured notes downgraded to 'BB' from 'BBB'; Fitch's three notch downgrade and the RWN assignment reflect the agency's view that Toshiba's significantly weaker operating and financial performance, as evident by their Q3FY2008 results, is likely to continue during FY2009 and possibly FY2010. Toshiba's Q3FY2008 revenues declined by 20.7% yoy, and its operating profit margin declined to -10.7% from 2.2% in the same period a year ago. Toshiba also revised its forecast for its full year results for FY2008 during the Q3FY2008 earnings release. According to the revised forecast, Toshiba expects consolidated sales to decrease to JPY6.7trn from its previous forecast of JPY7.7trn. Toshiba also lowered its operating income forecast substantially to an operating loss of JPY280bn from its previous forecast of a JPY150bn operating profit. The key drag on Toshiba's operating and financial performance is the Electronic Device segment which produces NAND Flash memory. An operating loss of JPY340bn is now expected in this division for FY2008 due to the combination of the prolonged over-supply situation in the industry during H12008 and significantly slower demand in H2. Although NAND Flash memory prices recovered during January and February 2009, thanks to the reduced production capacity of global players including Toshiba, Fitch is doubtful that the industry can sustain the improved price levels due to weaker than expected demand in the portable consumer electronics sector. In Fitch's view, substantial risks exist in terms of the potential erosion of Toshiba's competitiveness due to steep cuts in its capital spending and R&D. The resolution of the RWN reflects the potential for further negative rating action as Fitch assesses the future credit profile of this company in the context of ongoing adverse economic conditions. The negative rating actions taken on the above six Japanese names form part of a sector-wide rating review conducted by Fitch on its 17 rated technology issuers across Asia-Pacific. Accordingly, the agency has today simultaneously released separate press releases detailing the following rating actions (with the list below summarising the rating actions taken pertaining to the Long-Term FC IDR): China: ZTE Corporation: Affirmed at 'BB+' with Stable Outlook. Japan: - Panasonic Corporation: Downgraded to 'A+' from 'AA-' (AA minus); Rating Watch Negative (RWN) maintained; - Sharp Corporation: Downgraded to 'A' from 'A+'; Placed on RWN; - Hitachi, Ltd: Downgraded to 'BBB+' from 'A-' (A minus); Placed on RWN; - Sony Corporation: Downgraded to 'BBB+' from 'A-' (A minus); RWN maintained; - NEC Corporation: Downgraded to 'BBB-' (BBB minus) from 'BBB'; Outlook revised to Negative from Stable; - Toshiba Corporation: Downgraded to 'BB' from 'BBB'; Placed on RWN. Korea: - Samsung Electronics Co., Ltd.: Affirmed at 'A+'; Outlook revised to Negative from Stable; - LG Electronics Co., Ltd.: Affirmed at 'BBB'; Outlook revised to Negative from Stable; - Hynix Semiconductor Inc.: 'B+'; RWN maintained. Singapore: Chartered Semiconductor Manufacturing Ltd.: Downgraded to 'BB-' (BB minus) from 'BB+'; Negative Outlook maintained. Taiwan: - Taiwan Semiconductor Manufacturing Company Limited: Affirmed at 'A'; Stable Outlook; - United Microelectronics Corporation: Affirmed at 'BBB'; Stable Outlook; - Acer Inc.: Affirmed at 'BBB-' (BBB minus); Outlook revised to Negative from Stable; - ASUSTeK Computer Inc.: Downgraded to 'BB+' from 'BBB-' (BBB minus); Placed on RWN; - Quanta Computer Inc.: Affirmed at 'BB'; Outlook revised to Negative from Positive; - AU Optronics Corporation: Downgraded to 'BB-' (BB minus) from 'BB+'; Outlook revised to Negative from Positive. Contacts: Matt Jamieson, Seoul, + 82 2 3278 8355/ [email protected]; Kevin Chang, Taipei, +886 2 8175 7609/ [email protected]; Jongwan Kim, Seoul, + 82 2 3278 8371/ [email protected]. Media Relations: Nicole Batchelor, Singapore, Tel: +65 6796 7214, Email: [email protected]; Chinatsu Ozaki, Tokyo, Tel: +813 3288 2679, Email: [email protected] .

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