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Japan elec conglomerates seek to grow in headwind

Written by: Staff

TOKYO, Apr 24 (Reuters) Japan's Toshiba Corp and other electronics conglomerates will likely aim for higher profits for the current business year, driven by robust growth in the domestic economy and healthy global demand for microchips.

They also count on the World Cup soccer finals in Germany which begin in June to prompt people to trade in their bulky tube TVs for flat panel models, and VCRs for DVD recorders.

But rising costs of raw materials such as crude oil and looming interest rate increases pose tough challenges.

Japanese major electronics conglomerates also include Hitachi Ltd, NEC Corp and Fujitsu Ltd.

Hitachi and Fujitsu are set to announce earnings results for the year ended March 31 on Thursday, followed by Toshiba on Friday.

NEC's earnings announcement is slated for May 11.

''We need to watch out for interest rates and raw material prices. There is no way the industrial sector in Japan can be left unscathed by high oil prices,'' CLSA Asia-Pacific Markets analyst Takeo Miyamoto said.

''As for higher interest rates, they would have some effect on companies' fund-raising costs. But we don't know for sure yet how it is going to affect their capital spending stances.'' Japan's central bank scrapped its super-loose monetary policy in March, in a first step towards higher interest rates in a country where borrowing has been virtually free for years. Electronics conglomerates make consumer products but also operate infrastructure-related businesses such as power plants and computer systems integration, making their earnings susceptible to a general trend in capital investments.

BRUTAL COMPETITION Hitachi, which was weighed down by the sluggish performance of its display, flat TV and hard disk drive operations in the previous business year, targets a higher profit by turning the three businesses profitable by the second half of the year.

Hitachi, Japan's largest electronics conglomerate with annual sales of billion, last October cut its net profit forecast for the year to March by nearly two-thirds as the three units were hit hard by sharp price falls.

Industry specialists expect smaller losses in the three businesses, thus substantial recovery in overall Hitachi earnings this year. But they say that turning the three operations into the black by the October-March period would be a tough challenge.

''Price competition is brutal in all three areas. I will believe it when I actually see their results,'' JP Morgan Securities analyst Yoshiharu Izumi said.

Like Hitachi, NEC is expected to predict a sharp recovery from 2005/06 when its earnings were dragged lower by loss-making microchip and mobile phone operations.

Its chip unit, NEC Electronics Corp., aims to achieve an operating profit this year, up from an estimated loss of 36 billion yen for the last business year, by boosting sales in overseas markets such as China and cutting production costs.

NEC, a major cellphone maker, is also likely to benefit from a new rule in Japan from autumn requiring wireless operators to allow customers to keep their phone numbers when switching services.

Active user migration between operators is expected to spur handset demand.

NAND PRICE A CONCERN Brisk mobile phone demand will also come as a boon to Toshiba, the fourth-largest cellphone supplier in the domestic market. Other potential earnings drivers at the Tokyo-based company include medical equipment and hard disk drives.

On the other hand, recent sharp slides in flash memory prices have raised concerns about Toshiba's earnings growth this year.

Behind Samsung Electronics Co., Toshiba is the world's second-largest maker of NAND-type flash memory, which can retain data after power is shut off and is widely used in Apple Computer Inc.'s iPod and other portable electronics.

Samsung saw its NAND flash memory prices tumble 25 percent in the January-March quarter. But analysts expect prices to stabilise towards the second half of the year due to seasonal demand for digital music players and other NAND-heavy products.

As recovery in the broader economy allows the corporate sector to step up information technology-related investments, Fujitsu is expected see its computer services business expand.

The chips-to-computers conglomerate will also benefit from strong demand for its hard disk drives as well as telecommunications equipment used in high-speed networks.

''There is such a thing as 'Fujitsu premium' for its hard disk drives because of their quality. It may not be a giant operation, but it is definitely on the winning side,'' Mizuho nvestors Securities analyst Yuichi Ishida said.


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