With recessionary conditions prevailing in 3 developed economies; the US, Japan and UK, consumer spending has weakened significantly. In addition, emerging markets have also experienced moderation in GDP growth. Since Sony derives most of its revenues (approximately 78% of 3Q 09 revenues) from exports, any further weakness in global economic conditions are likely to have a significant impact on the company’s performance. Considering the Games segment’s revenues and profitability are primarily dependent on developed markets, we expect Sony to further lower its prices for the PS3 to remain competitive with Nintendo’s Wii in the current economic conditions. Consequently, we expect lower revenues and weaker product margins, resulting in operating losses for the Games segment over the coming year. Moreover, demand for Liquid Crystal Display (LCD) TV’s, digital cameras and laptops is also expected to remain subdued over the next year and half. Going forward, we expect margins to remain under pressure as Sony is likely to reduce prices for its high end LCD TVs in response to intense competition from low cost Chinese manufacturers. In addition, Sony’s Financial Services segment is expected to experience pressure, considering the prevailing recession in the domestic market. However, we anticipate the Pictures segment’s revenues and profitability to improve, in light of upcoming releases. We also believe Management’s on-going cost reduction measures will partially offset the margin contraction over next 2 years. Moreover, working capital requirements are expected to apply significant pressure on Free Cash Flow (FCF), partially offset by the anticipated slow down in capital expenditure over the next 2 years. Consequently our outlook for the common stock remains weak.

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