Bearish bets on Sharp Corp. (6753) climbed to a record high as Japan’s biggest maker of liquid-crystal panels works to complete a capital tie-up with Taiwan’s Foxconn Technology Group to stave off the threat of bankruptcy.
Short-interest on Sharp, an indication of bets that its share price will fall, climbed to 73.2 million shares, or 6.6 percent of stock outstanding, on September 7, the highest in more than two decades, according to weekly data compiled by Bloomberg. The maker of Aquos televisions and screens for Apple Inc. (AAPL)’s iPad has tumbled 69 percent this year, closing at a record low last month, after predicting an annual loss of 250 billion yen ($3.2 billion).
The decline has prompted Foxconn, whose flagship is Apple’s No. 1 supplier, to renegotiate terms for a capital tie-up agreed to in March. Sharp President Takashi Okuda must raise funds as the company burns through cash. Total liabilities reached 2 trillion yen at the end of June, the highest since at least 2003 and more than four times sales in that quarter, according to data compiled by Bloomberg.
“You can’t rule out the possibility of the company going bankrupt,” said Mitsushige Akino, who oversees the equivalent of $600 million in assets in Tokyo at Ichiyoshi Investment Management Co. “For overseas companies looking to invest in Sharp, it would be to their advantage if the company goes bankrupt because they’ll be able to buy it cheaper.”
Foxconn Group, through its two Taipei-listed units, Hon Hai Precision Industry Co. (2317), the world’s largest contract manufacturer of electronics, and Foxconn Technology Co., a maker of computer cases, agreed in March to buy 9.9 percent of Sharp for 67 billion yen in a sale of new shares. Foxconn founder Terry Gou has invested 66 billion yen of his own money into a Sharp TV panel factory in Japan.
Gou said on Aug. 5 he would put money into Sharp “at the most appropriate time and most appropriate price.” He ended a visit to Japan last month without announcing a deal. Speculation the Taiwanese company won’t proceed with the investment mounted after Gou didn’t attend a scheduled media briefing in Tokyo on Aug. 30, Amir Anvarzadeh, a Singapore-based manager for Asia equity sales at BGC Partners Inc., said by phone.
It’s unlikely Gou’s companies will proceed with the investment now that Apple decided not to buy screens for new iPads from Sharp, BGC’s Anvarzadeh said. Apple will use panels from AU Optronics Corp. (2409) and LG Display Co. (034220) for a smaller version of the iPad to be released in October, four people familiar with the plans said on Aug. 31.
Miyuki Nakayama, a Tokyo-based spokeswoman for Sharp, and Simon Hsing, a spokesman for Hon Hai, both declined to comment.
Concern that volatility of the company’s stock price will continue drove the number of shares held in Japanese margin- trading accounts to a record high on Aug. 29. Shares in accounts that profit if the stock falls reached 27.93 million on Sept. 11, three times more than those that make money if the stock gains, according to data compiled by Bloomberg News.
“There’s a lot of short selling as the market is pricing in the high probability of Sharp going bankrupt within the next one to two years,” Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm. “Sharp’s financial state is becoming a huge problem, it doesn’t even have all the funds they need to repay its debt due this financial year.”
Sharp needs to repay 205 billion yen of debt in the current financial year and 130 billion yen the year after, according to data compiled by Bloomberg News. The company has already put up its Osaka headquarters and some factories as debt collateral after its credit ratings were cut to junk.
Adding to signs of Sharp’s deepening financial woes, the electronics maker said Sept. 11 it’s discussing additional salary cuts with its labor unions, reducing managers’ salaries by 10 percent starting next month and lowering bonuses by half to save a total of 14 billion yen in fixed costs.
Sharp’s losses may exceed its own forecast in the current financial year ending March 31. The company is expected to report a net loss of 261 billion yen, according to the average estimate by 18 analysts compiled by Bloomberg. Of the seven estimates made since Aug. 23, the average was a loss of 295 billion yen.
None of the 23 brokerages covering Sharp that are tracked by Bloomberg have a buy rating, with 12 recommending sell and 11 telling investors to hold the stock, the data show.
“People have realized there’s a strong possibility Foxconn could walk away from this deal,” BGC’s Anvarzadeh said. “I would be very surprised if Sharp doesn’t go bankrupt by the end of this year.”