Japan built its economic miracle on the back of its export industries, including consumer electronics. Over the decades, few have survived the onslaught of a strong yen and intensifying Asian competition. By 2016, Sharp, a leader in liquid crystal displays, had taken the point. It sold control to Hon Hai Precision, the Taiwanese supplier of Apple.
That buyout revitalised Sharp, which remains listed in Japan. Hon Hai may well have bigger plans for the maker of televisions. This year Sharp shares have lagged behind peers but much is still expected
While Sharp’s share price more than quintupled after August 2016 when the takeover closed, earnings have lagged. Trading on 25 times forward earnings and at well over three times their forward book value, the shares promise a lot more growth.
Sharp missed full-year earnings estimates in April. Tuesday brought news that Sharp will raise ¥200bn ($1.8bn) in shares this summer — roughly a seventh of its market value. This did not play well, even though proceeds will pay off high-coupon preference shares. Neither did reports that Sharp plans to buy the PC unit which Toshiba has long tried to offload, for ¥4bn ($36m). Sharp’s shares lost 4 per cent.
To be fair to Hon Hai, no one denies that Sharp is in much better shape than a few years ago. Its balance sheet looks cleaner, with the ratio of net debt to ebitda (a cash earnings measure) at just over one, down from almost 12 times in 2015. Acquiring a lossmaking PC business may seem nuts. But Hon Hai knows a thing or two about getting costs down in an electronics industry with tight margins. Before buying Sharp, the profitability of Hon Hai was reasonable, if not spectacular. For many years it was debt free.
Hon Hai’s legacy will do nothing to stem investor pessimism toward Sharp near term, though. As an example, the cost of borrowing the shares to short them — 12 per cent — is very high. The negativity should eventually pass, but only if the share price falls further.
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