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Stocks

Sharp shares hit 3-year high on strong signs of recovery

Investors welcome prospect of return to first section

OSAKA -- Sharp's shares have surged of late on strong signs of a turnaround under Taiwan's Hon Hai Precision Industry, with investors banking on a swift return to profitability and to the Tokyo market's first section.

"We will soon begin the process of applying for a return to the Tokyo Stock Exchange's first section," Sharp President Tai Jeng-wu told employees at the end of February. A top executive also said at the end of last month that the upgrade could come at the end of this year or sometime next spring, rather than during fiscal 2018 as initially thought, and this has delighted investors.

The shares have gone up roughly 10% since then to close at 356 yen Monday, the highest since February 2014. Daily turnover on Sharp is more than 30% higher in March so far than in February.

At the end of March 2016, Sharp's net worth was negative, leading to the company's move on Aug. 1 from the first to the second section on the TSE. The electronics maker's shares hit a year-to-date low, before Sharp was acquired by Hon Hai, better known as Foxconn, on Aug. 12.

Recapitalization efforts have since put Sharp's net worth back above zero, and the share price has roughly quadrupled from last August's low. Earnings guidance for the year ending March 31 has been upgraded twice, putting the company on track to log its first pretax profit in three years.

Foxconn's role has been to help improve Sharp's overall cost structure. A renegotiated materials purchase agreement at the struggling solar cell business led to an earnings outlook upgrade on Feb. 17. Tai has taken issue with what he sees as the numerous unfair contracts Sharp is involved in, and has leaned on Foxconn's might to improve costs across the company.

Going back

But Sharp shares may be overheated despite these improvements, analysts have warned. "It's tough to explain the current price in terms of earnings outlook and fundamentals," said Yasuo Nakane of Mizuho Securities. Sharp anticipates a net loss this fiscal year, making price-to-earnings ratio calculations invalid. Sharp shares bought on the margin outnumber those sold on the margin by more than a factor of 30, compared to an average of three for the market overall.

Sharp's most important recovery milestone will be returning to the black in fiscal 2017 as targeted. This rests on the company moving past mere cost-cutting to "actual growth in revenue and profit," Nakane said.

Sharp's core liquid crystal display operations will have much sway over whether this effort succeeds. That business logged its first operating profit in eight quarters in October-December 2016. But there are fears that the panel market itself could slacken as Chinese rivals continue building new plants making LCDs for televisions.

A Foxconn-Sharp joint venture broke ground on its own 61 billion yuan ($8.84 billion) panel plant in the Chinese city of Guangzhou on March 1. The Foxconn group aims to be first in the world in terms of LCD output and technology, Chairman Terry Gou said.

History puts that ambitious target in a somewhat different light: It was, after all, overinvestment in LCDs that set off Sharp's financial crisis in the first place. For now, investors seem to be betting that backing from the rich and powerful Foxconn can help Sharp avoid a similar fate this time.

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