Regular Earnings Survey

FY08 Outlook: Sharp Drops in Sales, Profits amid Rapid Slowdown in Global Economy

Year of profit drags

Our FY08 forecasts call for sales to drop 7.2% y/y, operating profit to slide 54.3%, and recurring profit to tumble 64.4%, and net income to plummet 88.3%. These estimates represent the steepest drops in sales and profits since FY89. Earnings have been hit hard on both fronts. Volumes have suffered from inventory cutbacks and sharp erosion in demand triggered by the rash of issues that have plagued the global economy from 2H, while a wide range of sectors have meaningfully suffered from lower price realization. The sustained appreciation of the yen has further added to company woes. Many have begun implementing measures to contain fixed costs, but we expect the y/y increases to remain. Given a dearth in positives, profits are likely headed for declines across all industries in FY08.

Net income is expected to drop at a rate more significant than that for recurring profit. We may attribute it mainly to extraordinary losses, such as securities writedowns, and establishment of deferred tax asset valuation allowances.

We anticipate sharp drops in auto sales in both advanced nations and emerging economies. Production cutbacks are likely for PCs, mobile phones and digital cameras. This will likely undermine demand and prices for products such as automotive exhaust filters, synthetic fibers, flat glass, memory chips, and electronics components. The impact of these negatives will likely spread rapidly from assemblers to materials and resource names. We expect inventory adjustments for several products to play out in 1H FY09, thanks party to the sharp cutbacks in production, but such a scenario is unlikely to surface in FY08.

Profits to fall across all sectors

We have either forecast a decline in profit or dip into the red for all sectors (envisioned recurring profit growth in four sectors as of estimates from 27 Nov), although we foresee relatively smaller declines in domestic demand-oriented industries, including pulp & paper, services, broadcasters/ad agencies, and telecommunications. Granted, domestic demand is hurting, as evidenced by paper, advertising and mobile phone volumes. However, the pullback is relatively modest when viewed next to the slump in foreign demand. This is why we foresee a substantial drop in profits for automobiles, electrical/electronics and precision instruments, which alone account for over 60% of the profit decline in our aggregate estimate. The auto industry has been hurt by the appreciation of the yen, but the global slump in volume has weighed heavily on earnings. The strong yen also generated substantial headwinds for electrical/electronics and precision instruments, but sluggish global demand for tech products and the intensification of price wars in certain product lines have also dragged considerably on profits. We envision a dip into the red for both automobiles and electrical/electronics.

Sharply downgraded our estimates, primarily for exporters

We have downgraded our 27 November estimates, and now foresee a 7.2% y/y decline in sales and a 64.4% fall in recurring profit instead of drops of 1.3% and 29% previously. The only sector for which we upgraded recurring profit was telecommunications (on positives including gains on sale of real estate), vs. four sectors in November. Our sector downgrades numbered 26 vs. 23 in November. Those suffering the steepest cuts include electrical/electronics (price erosion in memory chips, audiovisuals and home appliances; lower component volumes), automobiles (bleaker global sales volume assumption), trading houses (drop in resource prices from 2H, global slowdown), and chemicals (reduced demand outlook for petrochemicals, electronics materials; strong yen demerits).

Global slowdown accelerating erosion in earnings from 2H

We anticipate severe deterioration in sales in 2H, and forecast a 16.1% y/y contraction after 2.5% growth in 1H. The same goes for operating and recurring profits. We expect the decline in the former to accelerate from a 17.6% drop in 1H to a 91.1% plunge in 2H, and envision a dip into the red for the latter following the 20.1% decline in 1H.