Sharp Abandons Shares due to the US-China Trade War

Originally published at Business Day.

Sharp cancels $1.8bn share offer

Sharp has been forced to abandon a $1.8bn issue of new shares after the announcement triggered a massive slump in its stock and ignited concerns over the strength of its business as a supplier to Apple, as Business Day reveals.

The Japanese company’s official reason for scrapping its plan, which it had only unveiled three weeks ago, was “market instability” arising from the US-China trade war. However, analysts questioned that rationale in the light of Japan’s relatively calm equity and currency markets.

Although Sharp’s shares closed up 15 per cent at ¥2,700 on Friday, analysts and investors pointed to other potential causes.

“The reason can’t be concerns about the market,” said Naoki Fujiwara, fund manager at Shinkin Asset Management. “There is little evidence that markets are concerned about the trade dispute. If that was the case, we would have seen the yen strengthen to ¥105 against the US dollar.”   The yen was trading at ¥110.6 to the dollar.

People involved in the deal cited two possible explanations for Sharp’s sudden cancellation of the issuance. One was that Sharp’s owner, Taiwan’s Foxconn, formally known as Hon Hai Precision Industry, moved to cancel the sale after a collapse in Sharp’s share price.

Between the issuance plans being unveiled and the close of trading on Thursday, Sharp’s shares had fallen 21 per cent on concerns the issue would dilute its earnings per share by about 20 per cent. Additionally, bankers involved in the deal roadshow said that the response from key buyers was not encouraging.

But a second reason for the cancellation, said analysts, may be impending bad earnings news from Sharp, which generates 22 per cent of its annual revenue selling screens for the iPhone and other Apple products.

“There is also a possibility that Q1 fundamentals are so weak that it would look bad to conduct a $2bn offering and then shortly thereafter issue poor financial results,” an analyst at SC Capital wrote in a report.

The same analyst said that recent interviews with other Apple suppliers suggested that sales of the flagship iPhone 8 and iPhone X might disappoint investors, with knock-on effects for key suppliers.

Sharp declined to comment on its earnings outlook. It said the decision to cancel its share sale was made to “maximise the benefit of its stakeholders” and was not in response to shareholder opposition to the plan.

The company had earlier said proceeds from the share sale would be mostly used to buy back shares from its lenders that were issued when it was facing a financial crisis in 2015. The company said it still planned to buy back preferred shares from its banks.