OREANDA-NEWS. Fitch Ratings has revised the Outlook on Sony Corporation (Sony) to Positive from Stable. The Long-Term Foreign - and Local - Currency Issuer Default Ratings (IDRs) have been affirmed at 'BB'. A full list of rating actions is at the end of this release.

The Outlook revision reflects Fitch's expectations of higher margins in Sony's non-financial businesses and deleveraging following restructuring and management's commitment to improve profitability. There is a high probability of a rating upgrade should leverage remain low and earnings stabilise further in key operating segments.

KEY RATING DRIVERS

Margin Improvement: Fitch expects Sony to continue generating modest operating profit from its non-financial businesses following cost reductions and restructuring. We also expect profitability to become less volatile due to downsizing, the termination of unprofitable businesses and lower restructuring charges. We expect improved profitability for the financial year ending March 2017 (FYE17), with an operating EBIT margin of 2.1% (FYE16: 1.9%), excluding Sony Financial Holdings (SFH).

Leverage Remains Controlled: Fitch expects Sony to deleverage over the next year or two due to better margins and lower capex. Excluding SFH, the company plans to invest JPY245bn in fixed assets in FYE17, compared with JPY372bn in FYE16. It also plans to cut its investment in image sensors to JPY60bn (FYE16: JPY260), resulting in FFO-adjusted leverage, excluding SFH, falling to 3x (FYE16: 3.3x).

Successful Game Business: We expect continued solid revenue from PlayStation 4 (PS4) and enhanced network services to support Sony's overall profitability, mitigating its weaker consumer electronics and semiconductor businesses. Sony has cumulatively sold more than 40 million PS4s, with this console being the fastest-selling in PlayStation's history. We expect higher PS4 software sales to follow the strong PS4 hardware sales, supporting firmer margins over the short term.

Temporarily Image Sensor Business Weakness: Structural weakness in the handset industry and slowing adoption of dual-lens cameras in high-end smartphones will delay profit growth for Sony's image sensor business in the short term. We believe the company's technology leadership and market-strength in image sensors will offset end-market decline. We expect profitability for the semiconductor division to revive in FYE18, following a FYE17 operating loss due to supply disruption cause by the Kumamoto earthquake in 2016.

Limited Consumer Electronics Recovery: Fitch believes stiffer competition in the consumer electronics industry and a frail industry outlook remain as key risks to Sony's margin recovery. The company is focused on higher-end markets and cost cutting, but stronger rivals, such as Samsung Electronics Co., Ltd (A+/Stable), Apple Inc. and emergence of Chinese competitors, pose a greater challenge to Sony's goal of increasing profit and market share in its electronics segments.

KEY ASSUMPTIONS

- High-single digit revenue contraction in FYE17 due to falling sales of image-sensors, negative effects from yen appreciation and further downsizing of the consumer electronics business.

- Ex-SFH operating margin to stay at around 2% in FYE17 then improve gradually.

- Ex-SFH capex on fixed assets to fall to JPY280bn in FYE17, from JPY372bn in FYE16.

- Annual cash dividend of JPY25bn.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to our Outlook on Sony's ratings being revised to Stable include (for Sony excluding SFH):

- sustained EBIT margins lower than 2%

- FFO-adjusted leverage sustained above 3.5x.

Positive: Further evidence of management strategy to deliver sustainable performance that may, individually or collectively, lead to a positive rating action include (for Sony excluding SFH):

- sustained EBIT margins higher than 2%

- FFO-adjusted leverage sustained below 3.5x

LIQUIDITY

Adequate Liquidity: Fitch expects Sony's liquidity to remain adequate. Excluding SFH, Sony had readily available cash of JPY750bn at FYE16, compared with debt due within one year of JPY244bn. The company also had unused credit facilities of JPY523bn and continues to have sound access to local banks and capital markets.

FULL LIST OF RATING ACTIONS

Sony Corporation

Long-Term Foreign - and Local-Currency IDRs affirmed at 'BB'; Outlook revised to Positive from Stable

Short-Term Foreign - and Local-Currency IDRs affirmed at 'B'

Local-currency senior unsecured rating affirmed at 'BB'