Sharp Restructure to Entail Mihara Plant Shutdown

Struggling Japanese electronic manufacturer Sharp will be shutting down its Mihara Electronic Component Plant, according to a latest Chinese-language Nikkei report.

On Tuesday, the company announced it will be restructuring its electronic component business, and discontinuing four plants. Part of the restructure plan includes the potential shutdown of three LED plants. Closedown of the Mihara plant will be completed by the end of 2015, and Sharp is evaluating the possiblility of shutting down another three plants located in Fukuyama.

Wrong business strategies attribute to Sharp's dire losses in 2014

Sharp forecasted it would bounce back to profitability in 2014, and estimated a gross profit of 30 billion Japanese Yen (US $250 million) for its latest fiscal year. Instead its latest financial report posted a net loss of the exact sum. Earlier Nikkei reports have estimated the company will incur further losses this year from selling its solar cell equipment and business at a discount price this year. Sharp plans to withdraw from the solar industry.

The lower revenues in 2014 were attributed to poor display sales, and wrong business strategies. In the TV industry, the company’s strategy of launching numerous TV models in the U.S. market fell flat. It’s 4K2K TV sales in the Japan domestic market also flopped with lower than expected sales. The company plans to pull out of North America and Australia TV business, and will sell its TV fab in Mexico, reported Nikkei.

Moreover, the company’s endeavors of acquiring Chinese manufacturer Xiaomi smartphone display orders ran into difficulties. Intense pricing competition from Japan Display and other rivals drove down display retail prices, which impacted Sharp’s revenues, according to a separate Nikkei report.

On top of that, the tablet display market, which was projected to show strong growth in 2014 fell lower than expectations. The company made a mistake by betting its growth on small to mid-sized flat panels where prices have annually fallen 20% to 30%, a Reuters report cited Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management saying.

Bank bailout will save Sharp from going under, but company needs new growth drivers

Sharp is in the process of seeking financial aid from its two major lenders Mizuho Bank and Bank of Tokyo-Mitsubishi UFJ. This is Sharp’s second bailout request within three years. The company’s shares fell 10% shortly after the announcement.

Banking experts said a debt-to-equity swap would be the most plausible option, considering Sharp raised over 100 billion yen through new share issues in 2013 and it has $8 billion in outstanding debt, reported Reuters.

“If Sharp does register 100 billion yen net loss, with debt of 980 billion yen and equity base of 160 billion yen, the company would have a whopping unsustainable 610% debt-to-equity ratio,” analyzed a Barron Asia report. “This was why Sharp was reportedly discussing a debt-for-equity swap deal with its bankers.”

Jefferies analyst Atul Goyal projected with financial aid from banks, Sharp is unlikely to go bankrupt. However, he noted the company will have no growth drivers left after selling its solar business, TV fab in Mexico, and shutting down electronic components business in Japan.

However, even going through significant restructuring, Sharp does not have growth drivers after that. Small-mid panels business in China was the only swing factor for Sharp, but this business is one of the main causes of downward revision of guidance this FY. Other businesses left, Appliance and business solutions (printers) are still profitable but do not grow,” wrote Goyal.

He projected Sharp’s underweight price target would be 230 Japanese Yen. The company’s shares traded at 233 yen this morning.

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