Less Sharp, Sharp
Back in the early 1900’s Sharp (6753.JP) was a metal fabricator who came to fame when the company’s founder developed the first ‘global mechanical pencil’, but saw that business destroyed in a 1923 earthquake. Moving the business to Osaka, Sharp began producing Japan’s first radio sets, and by 1953 was producing TVs, calculators, and microwave ovens 10 years later. Sharp had developed LCD technology for its calculator business, opening a Gen 1 line in 1991, but began investing heavily in LCD technology in the early 2000’s, building a Gen 4.5 fab in 2003, a Gen 8 fab in Kameyama in 2003, and the world’s first Gen 10 fab in Sakai, in 2009, which was able to produce, at the time, the world’s largest TV, a 65” model more efficiently than any existing LCD fabs. Unfortunately, the global economic crisis and the strong yen around that time wreaked havoc on the cost of Japanese produced panels and CE products, and Sharp’s financials continued to deteriorate until 2012, the company’s 100th birthday year.
After months of negotiations and a major reduction in price after continued stock price declines, Foxconn (2354.TT) purchased a 66% stake in Sharp for $3.5b (original price was ~$6.25b), while the Chairman of Foxconn took a 50% personal stake in the Sakai Gen 10 fab[1], with the capital expected to go toward maintaining the LCD business and funding Sharp’s development of OLED displays. As Sharp had been an early adopter of IGZO (Indium Gallium Zinc Oxide), a backplane technology used in large OLED devices, the plan was sound, but never fully materialized, although the company was the first to produce a commercial 8K TV as early as 4Q ’15, a dubious honor currently, but under the guidance of Foxconn, Sharp became profitable in 2017.
Sharp was not an exception to the display industry’s woes in 2022, and just reported its first loss since the Foxconn takeover (for the year ending in March ’23). While sales were up 2.1% y/y, Sharp reported an operating loss, with 84.6% of the loss a write-down of assets ($1.64b), of which 85.4% was against the company’s LCD business, 9.6% against the OLED business, and 4.9% against Sharp’s other businesses. The company indicated that lower selling prices, leading to lower sales, FOREX, and the heavy losses in the display business, were the reasons for the loss, while mix and cost reductions provided some offset, and while management emphasized that all segments except display saw sales increases in fiscal 2022, only one division saw a positive operating profit.
Company guidance for fiscal 2023 (3/24) was a bit darker than other CE companies stating “We expect the demand environment to remain weak in response to a reactionary decrease in demand from the COVID-19 pandemic, global inflation, high energy costs, geopolitical issues, and other factors. At the same time, carbon-neutral, DX, and other sectors will remain strong. We are seeing an easing related to the impact of semiconductor shortages, high raw material prices, and rising logistics costs; however, the future remains uncertain.” The company cited a 2023 goal of achieving net profit at all costs, through cost reduction, and the building of the company’s brand businesses, predicting a 0.5% increase in y/y sales and a modest profit (0.4% margin). This assumes a 34% improvement in display profitability, a 32.7% improvement in Sharp’s brand[2] business profit, and a small (+2.9%) improvement in the company’s device[3] business operating profitability. Inventory levels across the company and more specifically in display have fallen since their recent peak in 2022, but against an average level during the three years before COVID (2017 – 2019) of ¥226.3b and an Inv./Sales ratio of 1.19, there is still some trimming that needs to be done before the company could be considered ‘lean’.
While the Foxconn management has done a good job of removing the blinders that were on the pre-sale Sharp management, panel producers overall were unable to avoid the effects of both a return to pre-pandemic demand and catastrophic inflation. While the company did not break out the Sakai Gen 10 plant from others, we expect the large panel LCD TV business to see a recovery in 1H as prices for TV panels have gained ground, but we also agree with management’s assessment of demand in a post-pandemic environment, and now that inventory has been returned to more normal levels, demand will be the key to more than a ‘back-to-baseline’ year.
[1] Stake was sold back to Sharp in 2022 for $296m by Gou, making it part of consolidated income.
[2] Brand Business includes appliances, energy solutions, TV, and mobile devices.
[3] Device business includes display, IoT, and semiconductors.
After months of negotiations and a major reduction in price after continued stock price declines, Foxconn (2354.TT) purchased a 66% stake in Sharp for $3.5b (original price was ~$6.25b), while the Chairman of Foxconn took a 50% personal stake in the Sakai Gen 10 fab[1], with the capital expected to go toward maintaining the LCD business and funding Sharp’s development of OLED displays. As Sharp had been an early adopter of IGZO (Indium Gallium Zinc Oxide), a backplane technology used in large OLED devices, the plan was sound, but never fully materialized, although the company was the first to produce a commercial 8K TV as early as 4Q ’15, a dubious honor currently, but under the guidance of Foxconn, Sharp became profitable in 2017.
Sharp was not an exception to the display industry’s woes in 2022, and just reported its first loss since the Foxconn takeover (for the year ending in March ’23). While sales were up 2.1% y/y, Sharp reported an operating loss, with 84.6% of the loss a write-down of assets ($1.64b), of which 85.4% was against the company’s LCD business, 9.6% against the OLED business, and 4.9% against Sharp’s other businesses. The company indicated that lower selling prices, leading to lower sales, FOREX, and the heavy losses in the display business, were the reasons for the loss, while mix and cost reductions provided some offset, and while management emphasized that all segments except display saw sales increases in fiscal 2022, only one division saw a positive operating profit.
Company guidance for fiscal 2023 (3/24) was a bit darker than other CE companies stating “We expect the demand environment to remain weak in response to a reactionary decrease in demand from the COVID-19 pandemic, global inflation, high energy costs, geopolitical issues, and other factors. At the same time, carbon-neutral, DX, and other sectors will remain strong. We are seeing an easing related to the impact of semiconductor shortages, high raw material prices, and rising logistics costs; however, the future remains uncertain.” The company cited a 2023 goal of achieving net profit at all costs, through cost reduction, and the building of the company’s brand businesses, predicting a 0.5% increase in y/y sales and a modest profit (0.4% margin). This assumes a 34% improvement in display profitability, a 32.7% improvement in Sharp’s brand[2] business profit, and a small (+2.9%) improvement in the company’s device[3] business operating profitability. Inventory levels across the company and more specifically in display have fallen since their recent peak in 2022, but against an average level during the three years before COVID (2017 – 2019) of ¥226.3b and an Inv./Sales ratio of 1.19, there is still some trimming that needs to be done before the company could be considered ‘lean’.
While the Foxconn management has done a good job of removing the blinders that were on the pre-sale Sharp management, panel producers overall were unable to avoid the effects of both a return to pre-pandemic demand and catastrophic inflation. While the company did not break out the Sakai Gen 10 plant from others, we expect the large panel LCD TV business to see a recovery in 1H as prices for TV panels have gained ground, but we also agree with management’s assessment of demand in a post-pandemic environment, and now that inventory has been returned to more normal levels, demand will be the key to more than a ‘back-to-baseline’ year.
[1] Stake was sold back to Sharp in 2022 for $296m by Gou, making it part of consolidated income.
[2] Brand Business includes appliances, energy solutions, TV, and mobile devices.
[3] Device business includes display, IoT, and semiconductors.
Sharp Inventory & Ratio to Sales - Source: SCMR LLC, Company Data
Sharp - Monthly Display Sales - 2018 - 2023 YTD - Source: SCMR LLC, Company Data
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