Outlook on Asahi Glass revised to negative

Asahi Glass' earnings in its flat panel display business have been deteriorating significantly, and the prospect of near-term recovery is low, in our view.

-- Despite overall stagnant earnings, the company plans to increase capital expenditures, and thus we see the deterioration of its financial standing as likely to continue.

-- We revised the outlook on Asahi Glass to negative from stable, and affirmed the ratings on the company and its subsidiaries.

-- We would consider lowering the ratings if earnings in the company's flat panel display business remain low, and we see the recovery of the company's financial risk profile as unlikely.

Standard & Poor's Ratings Services said today that it had revised to negative from stable the outlook on its 'A' long-term corporate credit rating on Asahi Glass Co. Ltd. At the same time, we affirmed the 'A' long-term corporate credit and senior unsecured ratings and our 'A-1' short-term corporate credit rating on the company and its subsidiaries. The outlook revision reflects our view that earnings in the company's core flat panel display business has been deteriorating significantly, and that the prospect of near-term recovery is low. In addition, the company plans to increase capital expenditures despite its overall stagnant earnings, and we view that the deterioration of its financial profile is likely to extend over the next one to two years.

In fiscal 2011 (ended Dec. 31, 2011), operating profit in Asahi Glass' electronics business segment, including its flat panel display (FPD) business, dropped significantly by 30% year on year due to significantly intensified competition, price falls, and inventory adjustments in its major end-user market of thin film transistor liquid crystal display (TFT-LCD) TVs. The market growth of TFT-LCD panels has slowed substantially as the commoditization of the products has accelerated. Under the circumstances, we view that pricing pressure from users will remain high, and thus that the company will have difficultly maintaining its current level of profitability in the next one to two years. Furthermore, there have been and are likely to be more new entrants into the glass substrate market in China and Korea. As a result, we believe that competition in the glass substrate market will intensify. The company's glass business, which accounted for about 45% of total revenue in fiscal 2011, has seen its earnings deteriorate, and we believe that the business will likely remain vulnerable over the next one to two years, given the uncertainty of the economy in its core European market.

Asahi Glass plans to increase capital expenditures despite the company's forecasts of a deterioration in operating profit in fiscal 2012 (ending Dec. 31, 2012). Thus, we view its financial standing, which deteriorated in fiscal 2011, as unlikely to recover to fiscal 2010 levels in the next one to two years, despite the company having maintained adequate liquidity backed by its relatively high levels of cash. We will examine the company's willingness and ability to create positive discretionary cash flow in the coming months. Its funds from operations (FFO, before adjusting for working capital) to total debt (including lease and pension liabilities--Standard & Poor's assumptions as the company has yet to disclose these figures--and subtracting surplus cash) stood at 35%.

The negative outlook reflects our view that, due to the deterioration of earnings and high level of planned capital expenditures, the likelihood of the company's financial risk profile remaining weak over the next one to two years is more than one third. We may consider lowering the ratings if we believe that the profitability in the company's electronics business will deteriorate further, earnings in its glass business do not recover, and, as a result, the deterioration of its financial profile is prolonged. We would also likely lower the ratings if FFO to total debt (adjusting lease and pension liabilities and netting off surplus cash) will be below 45% on a sustained basis. In fact, we view that the company is less likely to generate enough cash flow to fully meet this downgrade trigger in fiscal 2012. On the other hand, we would consider revising the outlook to stable if a recovery in the company's earnings and financial standing becomes evident.