Japanese consumer electronics makers are set to forecast a profit surge this year on strong demand for flat-panel TVs and other digital appliances, but those outlooks could still fall short of investor optimism.
Sony Corp and Sharp Corp will kick off on Tuesday the reporting season for Japanese electronics makers for the year to the end of March, and the market will keep a close eye on their forecasts for 2004/05.
Investors and analysts expect manufacturers to deliver rosy outlooks as consumers swap ageing analogue appliances for digital devices, like liquid crystal display (LCD) TVs and DVD recorders.
"The real risk is whether earnings outlooks, which are all expected to be good, can live up to the market's expectations," said Kazuya Yamamoto, senior analyst at UFJ Tsubasa.
Digital electronics demand has been credited as one of the catalysts for Japan's economic recovery and investor optimism has fuelled a rally in electronics shares. Tokyo's electric machinery sub-index has risen 50 percent since March 31, 2003.
Last year, Sony learned the risks associated with lofty expectations when it announced a $1 billion fourth-quarter loss and a disappointing 2003/04 outlook. The "Sony Shock" prompted a two-day, 25-percent slide in the company's shares.
This year, Sony's net profit is expected to rise 14 percent from last year's estimates, according to consensus forecasts from analysts polled by Reuters Research.
Sony booked 175 billion yen in restructuring costs last year, but the entertainment and electronics conglomerate still has another 160 billion yen left on a three-year, $3.1 billion plan to improve profitability at its mainstay electronics division.
"We're expecting Sony to book almost the same amount in restructuring charges and finish up its plan a year early, so it can start reaping rewards from 2005/06," said Tetsuya Furumoto, analyst at Shinko Securities.
Furumoto expects Sony's 2004/05 operating profit to come in around 130 billion yen, 45 percent below consensus estimates of 189 billion yen, but he sees profits nearly tripling to 340 billion yen in 2005/06.
Despite criticism that it was late to the digital boom, Sony continues to win share in fast-growing corners of the electronics market, such as DVD recorders and flat-panel TVs, while holding a strong position in digital video and still cameras.
Analysts say Sony must beware of falling prices as its profit margins may be thinner than its rivals due to its late start.
"Prices are falling, but the cost of materials is rising, so that's not necessarily a great formula for profitability," said UFJ Tsubasa's Yamamoto.
Another company seen vulnerable to price falls is Sanyo Electric Co Ltd, the world's largest manufacturer of digital cameras. Analysts forecast camera prices to drop by up to 20 percent this year from a year ago.
Sanyo, which supplies cameras on an original equipment manufacturer (OEM) basis to Nikon Corp and Olympus Corp, could feel the heat from customers looking to squeeze profits as prices drop. Among Japan's consumer electronics firms, Matsushita Electric Industrial Co Ltd, maker of Panasonic electronics, probably faces the highest expectations for a strong 2004/05.
The Athens Olympics and the Euro 2004 soccer championships are seen driving demand for plasma TVs and DVD recorders, which should play to Matsushita's strengths as the Osaka-based company holds almost 50 percent market share in both products.
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