DBRS Confirms Honda at A (high), R-1 (middle)

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 confirmations reflect the Company’s strong business profile with its core fuel-efficient models very well positioned to benefit from the structural shift toward more fuel-efficient vehicles. DBRS notes that Honda also enjoys modest diversification benefits from its motorcycles business (where the Company is a global leader), as this segment partly offset weak automotive results during the recent economic downturn. The trend on the ratings is Stable. DBRS notes that Honda’s financial profile has been effectively restored to that prior to the automotive downturn, with its industrial operations enjoying a significant net cash position. The Company’s performance over the medium term is expected to be solidly in line with the projected growth of the global automotive industry, with the protracted recovery of mature markets being considerably bolstered by strong growth prospects in emerging markets.

The Company’s industrial operating results improved moderately in fiscal 2010 (F2010, ending March 31, 2010) as significant cost reduction efforts more than offset lower revenues and negative foreign exchange (FX) effects attributable to the strengthening of the Japanese yen. However, through the first half of F2011, Honda’s industrial results were markedly stronger as continued cost reduction efforts were bolstered by improved automotive sales that together more than offset ongoing FX headwinds. Honda’s stronger automotive results are most attributable to increases in its core North American market, where performance has benefitted from growing sales of higher margin Acura and light truck models. Sales in the Company’s native Japanese market were also significantly higher due to government buying incentives, (which were phased out as of September 2010). While volumes in Europe decreased (in line with the expiration of vehicle scrappage incentives across the region), this was more than offset by higher sales in Asia (excluding Japan) and other markets, most notably China and Brazil.

Performance of the automotive segment going forward is expected to remain solid over the near-to medium-term. While volumes in Europe and Japan are projected to decline, this is likely to be more than countered by higher forecasted sales in other Asian markets as well as in North America. In the United States, notwithstanding prevailing economic headwinds, the automotive market is likely to continue its protracted recovery with industry sales in 2011 and 2012 estimated to approach 13 million units and 15 million units respectively (vis-à-vis 11.6 million industry unit sales in 2010). Furthermore, Honda’s U.S. market share should slightly increase given an improving product cadence with planned full model changes of core products including the Civic, CRV (in 2011) and Accord (in 2012). In China, volumes are projected to grow in line with anticipated production increases at Guangqi Honda and Dongfeng Honda in the coming two years. The Company is also looking to materially increase its share in other Asian markets with the introduction of the Brio, a new model in the A-segment where Honda was previously under-represented.

In line with increasing environmental regulations worldwide, Honda is also placing heightened emphasis in reducing the emissions of its vehicle fleet through several applications, including further refinements of internal combustion engine (including the launch of a new 1.6 litre small diesel engine) as well as new hybrid models and, eventually, electric vehicles.

The ongoing strengthening of the Japanese yen remains a significant headwind for the Company. However, DBRS notes that Honda remains somewhat better positioned in this regard than its Japanese peers given relatively higher localized production, with a moderate 30% of Japanese production being exported in F2010. Going forward, the Company aims to further increase both localized production and component sourcing.

Regarding the Company’s financial services operations, this segment’s results improved substantially in F2010 and through the first half of F2011 based on much improved performance in North America (which represents the significant majority of the segment’s total finance portfolio), where higher volumes were accompanied by sharply lower credit and residual value lease losses (particularly in light-truck models).

DBRS expects the ratings to remain constant over the near-to medium-term. Forecasted earnings growth and free cash flow generation should further bolster Honda’s financial profile. Profitability will however continue to be challenged by the relative strength of the Japanese yen, although such headwinds may moderate going forward.

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.

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