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SoftBank profit grows 36% relying heavily on investment stakes

Vision Fund generates returns but debt and thin cash flow cast shadow

SoftBank Group Chairman and CEO Masayoshi Son has deployed the majority of the nearly $100 billion committed to its technology investment fund. (Photo by Ken Kobayashi)

TOKYO -- SoftBank Group on Thursday said its net profit rose 36% to 1.41 trillion yen ($12.9 billion) for the year ended March 31, driven largely by the Vision Fund, which reached 1 trillion yen in unrealized gains for the first time. Operating profit rose 80.5% to 2.35 trillion yen. 

CEO Masayoshi Son announced plans for a second Vision Fund, on par with the $100 billion investment fund backed by Saudi Arabia and Abu Dhabi, further accelerating the company's push into tech investment.

But the heavy reliance on the value of the stakes in companies in which it has invested, including some which are less transparent, has ratings agencies concerned.

Son has built a global profile as an investor thanks to his knack for finding companies like Alibaba Group Holding, on which SoftBank has substantial unrealized gains.

While his prowess has attracted attention from venture capitalists, the focus on investment is also creating challenges for his company, most notably a heavy debt load combined with relatively thin cash flow.

"SoftBank's challenge is to find a balance between interest payments and cash income," said Moody's Japan analyst Motoki Yanase. Its operating cash flow came to 1.17 trillion yen last year -- equivalent to just half its operating profit -- while interest expenses reached 633.7 billion yen.

For the January-March quarter, SoftBank reported a net loss of about 120 billion yen, stemming from a rise in finance costs and a drop in profit on Alibaba-related derivatives, despite operating profit for the quarter tripling from a year earlier to 494 billion yen.

His ability to generate returns from the Vision Fund will be tested when U.S. ride-hailing pioneer Uber Technologies begins trading on Friday. The Vision Fund is the top shareholder in Uber, with a 16% stake.

Uber has set a price range of $44 to $50 per share for its IPO, implying a market capitalization of between $74 billion and $84 billion -- a far cry from the $120 billion valuation rumored late last year and a slight increase from the $76 billion valuation in August.

The Vision Fund will still be sitting on a paper profit of about $2 billion from its Uber investment, most of which is believed to have been reflected in the fund's financial statement. This means SoftBank is unlikely to book further profits from Uber, unless the stock rallies after its market debut. SoftBank would show losses if the stock falls.

The Vision Fund invested $60.1 billion in 69 companies, which were collectively worth $72.3 billion at the end of March, according to a financial statement that SoftBank released Thursday.

The company's stock price has rallied 36% since the last meeting on Feb. 6, when Son unveiled a 600 billion-yen share buyback program.

Investors are already looking beyond Thursday's results for clues on Son's strategy amid signs that booming tech valuations are cooling down.

Another major question is the pending merger between SoftBank's U.S. mobile arm Sprint and T-Mobile. The two carriers have pushed back the deadline for regulatory approval by three months to July 29, raising concerns that U.S. regulators will not approve the deal.

Son has pushed for the merger as he transforms SoftBank from a telecommunications group into a holding company with a focus on investing in technology. A breakdown of talks will have a "negative impact on SoftBank's creditworthiness," SMBC Nikko Securities said in a recent note to investors. Sprint's debt of about $40 billion accounts for nearly 30% of SoftBank's total.

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