DBRS Confirms Honda Motor Co., Ltd. at A (high) & R-1 (middle), Trend Remains Stable

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 models very well positioned to benefit from the structural shift toward more fuel-efficient vehicles. The trend on the ratings is Stable. While DBRS recognizes that the Company’s recent results have been materially affected by significant production disruptions (attributable to the Great East Japan Earthquake and subsequently by severe flooding in Thailand), DBRS expects Honda’s performance to rebound considerably once full production capacity resumes and weak inventory levels are sufficiently replenished. DBRS notes that Honda also enjoys modest diversification benefits from its motorcycles (where the Company is a global leader) and financial services operations, with these segments partly offsetting the recent weak automotive results. As such, the Company has remained modestly profitable on a consolidated basis, with Honda’s balance sheet remaining essentially intact and the industrial operations maintaining a substantial net cash position.

The Company’s industrial operating results improved moderately in fiscal 2011 (F2011, ending March 31, 2011) as a function of higher volumes and positive mix effects in line with industry growth in Asia’s emerging markets and the ongoing (albeit moderate) recovery in the United States. However, performance in the first half of F2012 fell sharply, with the automotive segment incurring an operating loss for the period. The loss reflects significantly weaker volumes due to the above-cited production disruptions. While volumes were weaker across all geographic market segments, Honda was most adversely affected in the United States and Japan, which are the Company’s two primary automotive markets, with North America typically accounting for close to 60% of total vehicle sales.

In the United States, shortages of Honda vehicles prevented the Company from benefiting from that country’s ongoing automotive recovery, with year-over-year unit sales through the first half of F2012 contracting by 33%. Sales of the recently launched Civic were also adversely affected by such shortages. In line with the above, Honda’s U.S. market share for calendar 2011 stood at 9.0% (vis-à-vis 10.6% for 2010). In Japan, year-over-year unit sales through the first half of F2012 fell by 33%, with vehicle demand hit by the expiry of government automotive subsidies in addition to the effects of the Great East Japan Earthquake.

While F2012 results will be relatively weak, DBRS expects Honda’s performance through F2013 to substantially improve as the extensive production disruptions are gradually resolved. Replenished inventory levels would enable the Company to participate in the expected recoveries of both its major markets. In Japan, demand should grow from very weak 2011 levels, with this recovery further bolstered by the re-introduction of government subsidies toward the purchase of fuel-efficient vehicles. In the United States, volumes are again projected to materially increase this year, with industry levels likely approaching 14 million units. In addition to the replenished inventories, DBRS notes that Honda’s performance will also likely benefit from the Company’s relatively fresh product cadence. Honda recently introduced its revised CR-V, which has thus far received highly positive reviews. Furthermore, later this calendar year, the Company will introduce a new Accord, which has traditionally been the Company’s most profitable model. As such, the core of Honda’s product line over the near term will be relatively new; this should benefit its efforts in recovering lost market share, notwithstanding stronger competition. In other global markets, while Europe is projected to remain weak, this has not historically been an important region for the Company. Conversely, Honda is expected to benefit from its increasing presence in Asia’s emerging markets, with its performance over the medium term expected to be solidly in line with the projected growth of the global automotive industry.

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 Japanese production in F2011 estimated to represent less than 30% of global production. Going forward, the Company aims to further increase both localized production and component sourcing, with Honda recently announcing a new planned assembly facility in Mexico slated for completion in 2014 and with a projected production capacity of up to 200,000 units per year.

Earnings and free cash flow generation should rebound considerably subsequent to the first quarter of F2013 (in line with replenished inventory levels and full production capacity). However, in the event that Honda’s new models do not fare well and the Company does not significantly recover its lost market share in the important U.S. market as expected (thereby leading to protracted weak performance of the automotive operations), this could result in negative rating action.

Notes:
The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.