DBRS Confirms Nissan Motor at BBB (high), R-2 (high)

DBRS has today confirmed the long- and short-term ratings of Nissan Motor Co. Ltd. (Nissan or the Company) at BBB (high) and R-2 (high), respectively. The confirmations reflect the Company’s solid business and financial risk profiles. The trend of the ratings remains Stable, with Nissan’s recently improving performance in line with DBRS’s expectations. Earnings have improved strongly in the first half of fiscal 2010 (F2010, ending March 31, 2011) amid a moderate recovery in the automotive industry. The Company’s financial profile has in turn considerably recovered, with net debt-to-total capitalization of Nissan’s automotive operations being significantly reduced. However, the Company’s performance continues to be adversely impacted by ongoing foreign exchange headwinds (most notably the Japanese yen/U.S. dollar exchange rate).

In F2009, purchasing efficiencies and reductions in energy and raw material costs, combined with sharply lower provisions for residual risk on leased vehicles, enabled Nissan’s automotive operations to revert to profitability after incurring losses the previous year. However, DBRS notes that operating margins remained low relative to historical norms as global automotive industry conditions continued to be weak; most major markets contracted further year-over-year with the notable exception of China, which continued to exhibit very strong growth and emerged as the world’s single largest automotive market. Margins were also pressured by negative currency effects that reduced operating earnings by ¥163 billion (approximately $1.8 billion) year-over-year.

However, through the first half of F2010, operating performance has improved sharply as unit sales increased materially (i.e. above 10% relative to the same prior year period) across all geographic market segments, with volumes in China again growing by a dramatic 52%. Automotive operating margin for the six-month period was 7.0%, which is in line with historical levels and ranks favorably within the automotive industry.

Going forward, Nissan aims to benefit from the growth of the automotive industry (including a recovery of developed markets) by focusing on the three following strategic pillars: cost control; further expansion into emerging markets; and low-emission vehicle models. The Company has been increasing its efforts with respect to its alliance (the Alliance) with Renault S.A. (Renault). Synergies derived from the Alliance in 2009 totaled ¥228 billion; for 2010 Nissan is aiming to increase this further to more than ¥240 billion. Additionally, in April of this year, the Alliance also announced a strategic cooperation with Daimler AG (Daimler) aimed at sharing technology costs and best practices as well as increasing the scale and capacity utilization of the companies. The cooperation entails modest cross-shareholdings among the three companies through equity exchanges, with Daimler obtaining 3.1% of the shares of each of Renault and Nissan, with the latter two in turn obtaining 1.55% of Daimler shares each (for a total of 3.1%).

With limited growth opportunities in developed markets, the Company is looking at increasing its emerging market penetration, particularly the BRIC nations. In China, in line with the recent dramatic growth of the automotive industry, Nissan is planning to increase its production capacity from the current level of 670,000 units to more than 1.2 million units by F2012. Similarly, in India, the Company aims to double its production capacity to 400,000 units over the medium term. In Brazil and Russia, Nissan is looking to achieve substantial market share gains through additional product introductions. As smaller vehicles (i.e. A and B segment) tend to dominate emerging markets, the Company is placing particular emphasis on the development of a global compact car and plans to have three associated products available by F2012, with these models eventually totalling 1 million units.

In line with increasing environmental regulations worldwide, Nissan is also placing heightened emphasis in reducing the emissions of its vehicle fleet. Across its product portfolio, the Company is expanding the application of environmentally-friendly technologies and is marketing these efforts as its “PURE DRIVE” initiative. Nissan is also forging ahead with its zero-emission electric vehicles (EV) strategy. The Company has just launched the LEAF EV and is the midst of preparations for the mass-marketing of EVs, including five battery plants and seven assembly plants, with EV production capacity of the Alliance by 2013 targeted at 500,000 units.

DBRS expects the ratings to remain constant over the near- to medium-term. Forecasted F2010 earnings should further restore Nissan’s financial profile; with the automotive operations re-attaining a net cash position. Profitability will however continue to be challenged by the relative strength of the Japanese yen, although such headwinds may moderate going forward. Nissan’s performance in the long-term would also appear quite dependent on the ultimate global market acceptance of EVs, as the Company has placed greater emphasis on this technology relative to many of its peers. In the unlikely event that the Company were to incur further losses such that its financial profile is adversely impacted, this would likely result in negative rating implications.

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

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