Sony Corporation Message Board

this report reads really ugly... 64 pages



Japan 2020: Sony struggling to
adapt; moving to Conviction Sell
Equity Research
Structural hardware business decay a dilemma for Sony
In our view, Japan’s once iconic electronics name Sony is struggling to
adapt to the reality of structural decay in its traditional entertainment
hardware business. We believe Sony faces a dilemma. On one hand, if it
maintains its current course, we think legacy products (particularly TVs)
will erode Sony’s enterprise value as they continue to make heavy losses.
But on the other, restructuring your way to prosperity is rarely successful
in volume-sensitive businesses. We calculate the market is ascribing a
value to Sony’s hardware business (excluding semiconductors) of ¥400 bn,
whereas we believe it represents a negative value of ¥427 bn.
Silo structure is hindering Sony in the cloud age
Moreover, as we enter the era of the cloud—with integrated platforms such
as smartphones delivering multiple entertainment categories—we think
Sony’s current network devices and content services are commoditized.
The chief problem we see for Sony in distinguishing itself in the key
platform market is its silo structure for traditional hardware products. We
believe this is delaying withdrawal from commodity products, undermining
R&D efficiency by misallocating resources, and hindering development in
new-generation products such as smartphones or tablets. In our view, this
handicap will only increase as network products become the mainstream.
Caught in a vice; downgrade to Sell, Conviction list
Caught in this vice and with the market in our view being over generous on
Sony’s proposed rescue plan, we downgrade the stock to Sell (Conviction
list), from Neutral. We revise our 12-month target price to ¥1,000 (now
based on SOTP) from ¥1,300. We revise our FY3/13-FY3/14 operating profit
estimates by -14% to -12% on lower sales and higher restructuring costs.
Two scenarios – Base case and radical revival
In our base case scenario, we see Sony coming to recognize its rescue plan
is not working, and then embarking on a major and costly hardware
business overhaul in FY3/15-FY3/16. We think Sony can minimize TV
losses, but this process would cost ¥590 bn over two years, and we see
little chance of revitalizing the business’s fortunes. We also lay out a radical
scenario to revamp Sony— divest legacy hardware, devices, and financial
businesses; acquire extra music content; and develop a smartphone-based
platform — which we estimate could boost valuation to ¥4,200 by 2020,
although there is execution risk, that we don’t factor in.