DBRS Confirms Honda Motor Co., Ltd. at A (high) – Stable Trend

DBRS has today confirmed the long- and short-term ratings of Honda Motor Co., Ltd. (Honda or the Company) and its related companies at A (high) and R-1 (middle), respectively. The confirmation reflects the Company’s strong business profile, with its core automotive models very well positioned to benefit from the structural shift toward more fuel-efficient vehicles. The trend on the ratings remains Stable.

While DBRS acknowledges that the Company’s recent financial results are weak relative to historical norms, earnings are expected to improve going forward (i.e., beyond fiscal 2010), absent which DBRS would consider negative rating actions. DBRS notes that the deterioration in financial performance is primarily attributable to the automotive downturn and not reflective of specific company performance as Honda’s market share held firm or increased across most regions, with the exception of Europe, (which typically only accounts for approximately 10% of total automotive sales). Additionally, recent financial results have also been materially adversely impacted by the strengthening of the Japanese yen.

DBRS notes that Honda maintained ample liquidity through the financial and automotive downturn and continues to have a very solid balance sheet with its industrial operations reverting to a net cash position as of September 30, 2009. Furthermore, it would appear that the automotive downturn has bottomed out. In the Company’s core U.S. market, Honda’s unit sales relative to prior year periods declined by more than 30% from January to June 2009; however, in the last half of the year sales were flat year-over-year. While significant headwinds persist and the U.S. industry continues to be at very weak levels, DBRS expects this trend of gradual improvement to continue with total industry (car and light trucks) sales in the United States estimated to approach 12 million units in 2010; vis-à-vis 10.4 million units sold in 2009.

Honda’s automotive operations benefit from the strong representation of its four core models, namely the Fit/Jazz, Civic, Accord and CRV models, which in total accounted for 76% of the Company’s global unit sales in 2008, (relative to 58% in 2000). The growing prominence of these core models serves to increase Honda’s efficiency and support margins. Additionally, each of these models is very well positioned to benefit from the shift in vehicle segmentation toward more fuel-efficient vehicles that is expected to persist given volatile fuel prices, increasing emissions regulation across mast mature markets and heightened environmental awareness amongst consumers. Accordingly, the Company is also seeking to strengthen its presence in hybrid models, with last year’s launch of the Insight model to be followed by the upcoming introductions of the CR-Z hybrid sports car and Fit hybrid in 2010.

In fiscal 2009 (ending March 31, 2009), modest diversification benefits were provided by Honda’s motorcycles segment (that has historically performed well in previous downturns), having accounted for more than half of the Company’s total operating profit that year. Through the first half of fiscal 2010, notwithstanding weaker performance year-over-year, motorcycles remained the only profitable segment among Honda’s industrial operations. Regarding the Company’s financial services operations, North America also dominates this segment’s performance which was adversely impacted in fiscal 2009 by higher provisions for residual and credit losses. DBRS notes, however, that this segment maintained ample liquidity through the downturn given well diversified funding sources and remained solidly profitable with delinquencies and charge-offs being significantly lower than the financial services industry average. Additionally, through the first half of fiscal 2010, profitability improved substantially over prior year levels given lower funding costs and residual losses.

Going forward, notwithstanding significantly lower forecasted revenues, the Company projects operating earnings in fiscal 2010 to be flat year-over-year at 190 billion yen, largely as a result of substantial cost reductions that are expected to exceed 350 billion yen. Over the near to medium term, DBRS expects the Company’s profitability to improve in line with the gradual recovery of the automotive industry. Honda’s profitability will, however, likely remain lower relative to historical norms as industry volumes in its core U.S. market are not expected to approach the historical highs of 16 million units over the next few years. Additionally, sales in its native Japanese market (which were recently bolstered by scrappage and tax incentives) will also likely remain lacklustre in line with the structural decline of that market. Honda’s profitability will also continue to be constrained by the Japanese yen, which has recently appreciated significantly vis-à-vis the U.S. currency and will likely remain a material headwind over the near term.

However, the ratings incorporate DBRS’s expectation that the Company will maintain its strong financial and business profiles, with its competitive position in North America well defended by the upcoming launches of several new models that will strengthen the product cadence of Honda’s lineup in that key market. Additionally, the Company’s strong financial services operations and consistently profitable motorcycles division provide further support for the ratings, which are expected to remain constant over the near to medium term.

Notes:
All figures are in Japanese yen unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.

This is a Corporate (Autos and Auto Suppliers) rating.

Honda Canada Finance Inc. is supported by Honda Motor Co., Ltd.