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Last updated: November 17, 2005 4:26 pm

Sanyo’s survival hangs in balance

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Sanyo Electric is facing a day of reckoning. When the troubled consumer electronics group unveils its results for the first half of the fiscal year ended September 30, the focus will be on whether it can avoid becoming the first full-scale casualty of turbulence in the consumer electronics sector.

Japan’s third largest consumer electronics group, which just a few years ago was lauded as “the GE of Osaka”, is now seen as on the brink of collapse.

“I believe that [as a result of their losses] their shareholder equity is already gone”, which means they are technically insolvent, said Carlos Dimas, analyst at CLSA in Tokyo.

Others were even more blunt. “Without a capital increase, they will die,” said Mana Nakazora, credit analyst at JP Morgan.

The group’s plight underlines the problems that have beset Japanese consumer electronics makers.

The profitability of the digital consumer products that drove earnings only a few years ago, such as DVD recorders and digital cameras, has dropped amid fierce competition and oversupply.

Along with other iconic consumer electronics names – Sony, Pioneer and JVC – Sanyo is paying the price for failing to respond more quickly to its changing business environment.

The group has forecast losses of Y140bn (US$1.2bn) this year after a record Y171.5bn in losses last year, partly due to an earthquake that devastated a key semiconductor plant.

Sanyo’s problems include Y1,227bn in interest-bearing debt, equal to more than four times its shareholders’ equity of Y288bn.

Mr Dimas figures that with a loss of Y140bn, its shareholder equity ratio, which was 11 per cent at the end of the last financial year, would fall to as low as 5 to 6 per cent. “For a long time the company has done nothing to improve the health of its balance sheet so they are having to adjust to a [severe market environment] and rebuild their finances at the same time,” he says.

The company has suggested it could receive a capital injection from its main bank, SMBC, reported to be Y200bn to Y300bn, which would at least avert a capital deficit.

But that hardly guarantees Sanyo’s survival, since the fresh capital is likely to be sufficient only to cover the shortfall in shareholders’ equity, Mr Dimas notes.

A mooted sale of a stake in subsidiary Sanyo Electric Credit would help to cut debt but would not be enough to ensure the group’s long-term survival.

“What is most important is whether or not the losses will stop,” Toshihiro Uomoto, credit analyst at Merrill Lynch in Tokyo, said in a report.

Sanyo today needs to unveil a bold restructuring programme, backed by sufficient capital, that shows it plans to withdraw from areas in which it cannot compete, such as white goods and audio-visual products.

If it does not, it will risk another battering in the markets and the downgrading of its credit ratings.

“They have no choice, if they want to keep the company alive,” Mr Dimas says.

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