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Fitch Affirms Panasonic at 'BBB'; Outlook Stable
February 15, 2017 / 7:06 AM / in 8 months

Fitch Affirms Panasonic at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/HONG KONG, February 15 (Fitch) Fitch Ratings has affirmed Panasonic Corporation's (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured rating at 'BBB'. Its Short-Term Foreign- and Local-Currency IDRs have also been affirmed at 'F2'. The Outlook on the Long-Term IDRs is Stable. KEY RATING DRIVERS Diversified Business Portfolio: Panasonic's credit profile benefits from its extensive product portfolio, including consumer electronics and auto-, housing-, industrial- and energy-related products, which reduces volatility in the company's overall operating performance. We expect Panasonic to maintain market leadership in its major products based on its ability to develop products with advanced technology and its well-established brand and distribution channels. This mitigates the risks of operating in cyclical and competitive industries, such as electronics and auto components. Margin Stability Improves: We expect Panasonic to maintain stable profitability after the restructuring of unprofitable businesses, downsizing of the consumer-electronics business and reduction in fixed costs. A recent shift in its strategy to expand business-to-business solutions, especially in auto-related components, will bring further stability to its earnings. We expect Panasonic to generate EBIT margin of around 5% over the medium term (FYE16: 5.5%), although a delay in recovery of the Japanese housing market, an increase in R&D expenditure and unfavourable currency movements are likely to result in some deterioration in Panasonic's performance in the fiscal year ending 31 March 2017 (FYE17) Accelerating Investment for Growth: Panasonic continues to invest in business areas where it has strong expertise, such as auto and housing, in order to achieve sustainable profit growth. The company aims to increase its operating profit to JPY500bn by FYE19 (FYE16: JPY416bn). The increasing investments to expand revenue and profit are necessary, but the strategy carries risks as it takes time before the new business areas to contribute meaningfully to profit. The company's ability to maintain its current financial profile while investing in growth will be a key factor for its credit strength. Conservative Balance Sheet: Panasonic's balance sheet should remain conservative in the medium term as the operating cash generation is sufficient to fund incremental investments, although the leverage ratio is likely to increase in FYE17. This is due to lower operating margins, heavy capex and the acquisition of Hussmann Corporation in September 2016. However, we forecast the company to turn free cash flow positive from FYE18 after a slight deficit in FYE17, and funds from operations (FFO)-adjusted leverage to hover around 2x by FYE18 after increasing to 2.7x in FYE17 (FYE16: 2.5x). Strong Liquidity: Fitch expects Panasonic's liquidity to remain strong. At end-December 2016, Panasonic's unrestricted cash of JPY1.15trn comfortably covered its debt due within one year of JPY25bn as well as long-term debt of JPY1.1trn. The company has been in a net cash position since 2QFYE15, driven mainly by strong operating cash inflow. We expect the company to maintain solid liquidity going forwards with reduced volatility in earnings. DERIVATION SUMMARY Panasonic's credit profile is stronger than that of other Asia-based consumer electronics companies, such as LG Electronics Inc. (BBB-/Stable) and Sony Corporation (BB/Positive), both in terms of profitability and leverage. In addition, we believe Panasonic has a superior business structure that generates more stable margins with increased resilience against cyclical consumer electronic demand. Panasonic's business profile is weaker than peers in the appliances and capital goods manufacturing segment, such as Whirlpool Corporation (BBB/Stable) and Continental AG (BBB+/Stable), due to its higher exposure to low-margin products and highly competitive markets. However, this is largely mitigated by Panasonic's higher product diversification and more conservative capital structure with net cash position. No country ceiling, parent and subsidiary linkages or operating environment aspects impacts the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to decrease by the low-single-digits in FYE17, due mainly to the slow recovery in domestic housing-related segments and unfavourable currency effects. - EBIT margin to stay around 5% in the medium term, slightly slower than in the previous year (FYE16: 5.5%), as most business segments are generating stable margins. - Capex in FYE17 to increase to around JPY345bn (FYE16: JPY242), as indicated by management, and is likely to stay at high levels in the short term. - FCF deficit in FYE17 with high capex and M&A transaction and then turn positive for the next few years, although higher capex may limit the FCF margin to 2% in the medium term (FYE16: 1.2%) RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: - EBIT margin sustained above 5.5% - FFO-adjusted leverage sustained below 1.5x. Developments that may, individually or collectively, lead to a stabilisation of the Outlook include: - EBIT margin sustained below 4.5% - FFO-adjusted leverage sustained above 2.0x. Contact: Primary Analyst Shelley Jang Director +82 2 3278 8370 Fitch Ratings Australia Pty., Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeoungdeungpo-Gu Seoul, Korea Secondary Analyst Kelvin Ho Director +852 2263 9940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019003 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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