Despite Abenomics Japan's Sharp Post Biggest Loss In 100 Years
As reported earlier, at least one prominent hedge fund manager, Dan Loeb, is very bullish on Sony (or at least has played his cards well enough to buy the stock 50% lower and is using today's ramp to offload to unwitting momentum chasers as he did with Herbalife). Whether he is merely using the opportunity to earn some activism brownie points on the background of the overall levitation of the Japanese stock market, or is genuinely convinced there is upside for Sony remains to be seen. However, anyone who thinks that Japanese corporates have no place to go but up, is kindly urged to take a look at one-time Japanese electronics titan Sharp, which posted a whopping loss of $5.36 billion, the biggest loss in the company's 100 year history.
To Abe's surprise, the plunge in the Yen was not nearly enough to offset such things as a collapse in quality, innovation, and overall demand for one's products. The only question is whether this will also be the case for other companies which have now lost all innovation and "coolness" leadership to Korean competitors such as Samsung and LG. In other words, will price competitiveness be sufficient to offset everything else going south?
As for Sharp, the company does what all companies do in a case when they can't boost revenue even when the central bank has made all their products relatively cheaper by 20%: blame management and the Chairman. From the WSJ:
After posting an annual net loss of ¥545 billion ($5.4 billion), the biggest in its 100-year history, Sharp Corp. said it plans to replace both its president and chairman after just one year in an unusually public rebuke of former management that underscores the depth of the struggling electronics maker's problems.
Sharp said Tuesday that Executive Vice President Kozo Takahashi, 58, will replace current President Takashi Okuda, who led the company during a tumultuous year in which it scrambled to secure capital and warned about its future.
Mr. Okuda will become a chairman without representative rights, replacing Mikio Katayama, a former president who oversaw Sharp's aggressive—but ultimately failed—expansion of its liquid-crystal-display TV-panel business. The changes will occur after Sharp's shareholders meeting June 25.
What precipitated Sharp's epic collapse? The same factors that have led to the general collapse of the entire Japanese export industry: letting South Korea outgun it in every area:
After years of record profit that catapulted it to the top of Japan's electronics sector, Sharp spent billions of dollars to build a state-of-the-art LCD plant in Japan. However, when demand for flat-screen televisions slowed in the wake of the financial crisis and the yen rose sharply—hurting the competitiveness of its exports—Sharp's losses ballooned.
Like its Japanese peers, Sharp also failed to match the operational speed or marketing might of Samsung Electronics Co. Sharp's televisions dominated in the domestic market, but it struggled to build the same type of brand appeal overseas. When the Japanese government eliminated subsidies encouraging domestic consumers to switch to new LCD models, it worsened Sharp's problems.
But what is more disturbing than boosting the top line, even with the BOJ's unprecedented assistance, is the company's balance sheet.
Sharp's financial situation remains worrisome. As of the end of March, it had nearly ¥2 trillion in liabilities, 10 times the amount of cash and cash equivalents on hand. The company's equity ratio, a measure of financial stability, is 6%. A ratio below 10% is considered dire. Crippled by two straight years of record losses, Sharp has been forced to turn to rivals Hon Hai Precision Industry Co. Ltd. and Samsung as well as chip maker Qualcomm Inc. for equity investments to shore up its finances. It is facing a ¥200 billion convertible bond redemption in September and an additional ¥130 billion in bond redemptions in 2014.
And the liquidity is just going from bad to worse:
Sharp said it exercised an additional credit facility of up to ¥150 billion from its main lenders, Mizuho Financial Group Inc. and Bank of Tokyo Mitsubishi UFJ. This additional borrowing is on top of a ¥360 billion credit line extended by the banks.
However, all of the above is just "reality" - and who cares about that in the New Normal. After all 4 years of constantly disappointing "reality" have merely pushed the G-0 central banks to ramp up their reflation efforts to unprecedented levels. And it is not reality that matters, but models - remember to an economist it is never a (DSGE) model that incorrect, it is reality that is wrong. So time to do more of the same, and in the meantime, boost optimism and hopium. That is the only thing the centrally-planned nomenkaltura has. Same with Sharp.
For the current year to March 2014, Sharp said it plans to return to the black with a net profit of ¥5 billion, an operating profit of ¥80 billion on revenue of ¥2.7 trillion.
And if it doesn't? Don't worry. It will just project profit for 2015.... Then for 2016... Then for 2017... And so on.