Japan's electronics conglomerates to post losses?

Japan's big four electronics conglomerates, led by Hitachi, are expected to post quarterly losses this week because of a slump in their chip businesses, but analysts say they will likely forecast a recovery in the second half and a rise in profit for the full year.

April-June first-quarter results from Hitachi, Toshiba, Fujitsu and NEC, due on Thursday, will pale in comparison with last year when there was particularly strong demand for computer chips.

"Chip demand was at its peak a year ago and it has probably bottomed out in the quarter just ended," said JPMorgan Securities analyst Yoshiharu Izumi.

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"Because we are comparing the crest with the trough, the scale of the decline is quite big," he said.

The first quarter for the companies tends to be weakest.

Unlike consumer electronics companies, electronics conglomerates are active in infrastructure-related business such as power plants and computer systems integration for the public sector.

This means revenues tend to concentrate in the final quarter.

The outlook for the sector brightened after last week's announcement by Elpida Memory that an oversupply in the DRAM market would likely ebb in the second half of 2005.

Elpida, a joint venture between Hitachi and NEC that ranks as the world's fifth-largest DRAM chip maker, reported a net loss of $29.56 million (3.3 billion yen) for April-June but said it expected a profit of about $125 million (14 billion yen) for the full-year to next March.

That, many analysts said, was a sign the top four electronics conglomerates could manage to pull off a rise in full-year profit despite the slump in the first quarter.

Company executives and industry watchers expect the revaluation of China's yuan currency last week to have little immediate impact on earnings.

"We have established a pretty even balance between imports and exports. I believe the impact will be very small," Hitachi President Etsuhiko Shoyama said late last week.

China revalued the yuan by 2.1 percent on Thursday, linking it to a basket of currencies and abandoning a decade-old peg against the dollar.

Hard drive woes
Investors are expected to focus on Hitachi's outlook for its struggling hard drive operations.

Hitachi, a sprawling giant with products ranging from nuclear power systems to plasma panels, bought IBM's disk drive division in 2002 for $2.05 billion, and targeted the unit as one of its core businesses.

But the hard disk operations have been mired in the red in recent years, hit by low production yields and fierce competition from rivals such as U.S.-based Seagate Technology.

In contrast, Seagate, the world's largest hard drive maker, last week posted a record quarterly profit, helped by strong demand for desktop PCs and consumer electronics products.

"The market condition is not bad, and demand is there for them to grab," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"Still, Hitachi's disk drive business is losing money. I have to say this is a little problematic," he said.

Among the top four electronics conglomerates, Toshiba, the second-largest behind Hitachi, is expected to have been the best performer in April-June, helped by strong demand for NAND flash memory.

NAND flash is a popular memory device widely used in photo-snapping phones, digital cameras and portable music players such as Apple Computer's hot-selling iPod Shuffle.

Worry on flash memory
But some analysts are concerned that profitability of Toshiba's NAND flash business may come under heavy pressure soon as price competition intensifies.

South Korea's Samsung Electronics, the world's largest NAND flash maker, has a policy of cutting prices aggressively to create fresh demand and expand the flash market.

"Toshiba enjoys voracious flash demand at the moment. But Samsung will be slashing NAND prices in the second half. I'm afraid this could hurt Toshiba pretty badly," said Shinko Securities analyst Yoshihide Ohtake.

NEC has already suffered a major setback. Its chip unit NEC Electronics issued a loss warning for the quarter and slashed its full-year forecasts because of slow demand for microchips used in cell phones.

Investors will be eyeing NEC's quarterly earnings to determine whether recovery in its cell phone handset business and demand for mobile phone base stations are strong enough to offset lower-than-expected profits at the chip unit.

Investors will also be watching to see whether Fujitsu reverts to its old habit of repeatedly posting major special losses for unprofitable software and computer services contracts.

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