TOKYO -- After a fourth straight year of losses, Japan Display is looking for ways to return to profitability in fiscal 2018. But sluggish demand for its smartphone displays and stiff competition from Chinese and South Korean rivals are hindering efforts, despite the company's major restructuring.
JDI, as the company is known, announced on May 15 that it had booked a record net loss of 247.2 billion yen ($2.24 billion) for the year ended March 2018 due to costs related to structural reforms and weak sales of its mainstay liquid crystal display panels.
Still, the company remains determined. "We'll transform our company into one that can generate profits through structural changes," Chairman and CEO Nobuhiro Higashiiriki said at a news conference on the day of the announcement, stressing the significance of the deficit.
The main factor for the disappointing results was 143.7 billion yen in reform expenses, including impairment losses on production facilities and stocks. Now, after four years of poor performance, JDI's net worth has fallen to 117 billion yen as of April, reducing its capital adequacy ratio to 17.8%.
A more serious problem is JDI's diminishing ability to generate cash. Sales have plunged after Apple -- its biggest client -- adopted organic light-emitting diode panels for the iPhone X released last autumn.
Operating cash flow, a measure of the cash generated by a company's core operations, was in the red for fiscal 2017, at negative 700 million yen. This contrasts with a positive cash flow of 112 billion yen in the preceding year. The inability to generate cash has forced JDI to seek outside funding.
For fiscal 2018, however, the company expects earnings to rebound as hopes mount for Apple's next-generation iPhone, scheduled to launch this autumn.
Hiroshi Hayase, senior director at British market research firm IHS Markit, speculates that "shipments of models with LCD screens are likely to surpass those with OLED screens."
This has fueled optimism, with company forecasts for 2018 showing sales up 10% to 20% on the year and operating margin hitting 2% to 3%. In particular, JDI predicts a "huge revenue growth in the second half," said Chief Financial Officer Takanobu Oshima.
Still, when or if JDI can regain its footing remains unclear. Sales of screens for Chinese mobile devices accounted for 11% of the company's total sales between January and March, down 18 percentage points from the same period a year earlier. The poor result was attributed to slowing demand in China's smartphone market and fierce competition from Chinese rivals, who have improved their technical expertise.
This hit JDI hard, as "panels for luxury smartphones in China deliver higher profit margins than those for Apple devices," said Yasuo Nakane of Mizuho Securities.
Another risk is the ongoing trade dispute between the U.S. and China. The U.S. Commerce Department has slapped a seven-year ban on Chinese telecom equipment maker ZTE from doing business with American companies, forcing it to suspend smartphone sales. The ban could slash JDI sales by a few billions of yen, said Higashiiriki.
Moreover, if the U.S. decides to extend the ban to Huawei Technologies and other makers, JDI could see sales tumble further.
In hopes of stopping the slide, the company announced on Tuesday that it was promoting Executive Vice President Yoshiyuki Tsukizaki to president. Current President Shuji Aruga will become a technical adviser.
Under the new leadership, JDI will try to bolster sales of automotive display panels to reduce reliance on smartphones, the screens of which account for 80% of sales, tying company performance to the whims of the smartphone market. The automotive display panel market is expected to generate more stable revenue streams.
Tsukizaki was head of the company's automotive display division through March, playing a major role in negotiations with European automotive parts makers. He also helped drive automotive display panel sales past 100 billion yen for the first time in fiscal 2017.
JDI commands the world's biggest market share in that segment, according to IHS Markit.Challenges also lie ahead for the company's OLED panel business. JDI has been exploring capital partnerships with Chinese companies and other entities for production of the panels. But talks have dragged on past the March 2018 deadline.
"We will make a decision on investments in mass-production with foreign partners based on careful assessments of the market, as well as demand for OLED panels," said Higashiiriki.