DBRS Confirms Nissan Motor Co., Ltd. at BBB (high), Trend Remains Positive

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 ratings incorporate Nissan’s solid business profile as a major automotive original equipment manufacturer (OEM) of improving geographic diversity, with the Company’s performance becoming progressively less dependent on its native Japanese automotive industry, in line with ongoing growth across other international markets. DBRS notes that Nissan’s financial risk profile is also solid, with the automotive operations having a net cash position as of September 30, 2012, and the Company’s credit metrics readily above the current ratings.

DBRS had assigned a Positive trend on the ratings in its prior review (for details, please refer to DBRS press release dated November 30, 2011), citing Nissan’s improving financial performance while also recognizing the Company’s increasing geographic diversification, primarily as a result of significant inroads made in China, which is now the world’s largest automotive market and (notwithstanding recent moderation) is expected to see material growth going forward. While DBRS still believes Nissan may possibly be subject to future positive ratings action, the Company’s recent performance momentum has been somewhat tempered by ongoing foreign exchange headwinds and higher selling expenses (the latter essentially reflecting a return to more normal levels following previous countermeasures adopted in response to last year’s Great East Japan Earthquake). More significantly, however, Nissan’s sales in China have undergone a sudden decline this autumn as local buyers shunned models of the Japanese OEMs in light of a territorial dispute involving a series of islands in the region. DBRS notes that the drop in sales has been substantial, with the Company’s monthly deliveries in September and October falling by 35% and 41% respectively. (Note: As Nissan’s most recent financial results incorporate the performance of its Chinese operations from January through June 2012, the adverse effect of the recent drop in Chinese volumes is not reflected in these figures.) With China now also being Nissan’s largest single market, where margins are typically significantly higher than the Company’s global average, a sustained drop in local sales of such magnitude would have a material adverse impact on Nissan’s future performance. As the duration of the territorial dispute between China and Japan is at this point uncertain, further positive rating action remains subject to the Company’s sales in the region reverting to its prior patterns of ongoing growth.

Across other markets, Nissan’s sales in North America have increased in tandem with the ongoing recovery of the North American automotive industry. Market share through the first half of F2012 declined nominally as, while in the middle of a significant global product offensive, Nissan was gradually phasing out certain models. Profitability in North America was also moderately lower, although DBRS notes that margins nonetheless remained solid. Although Europe continues to be burdened by severe automotive conditions reflecting economic challenges significantly attributable to the continent’s sovereign debt crisis, DBRS notes that Nissan’s exposure to Europe remains well manageable; representing on average less than 10% of total profitability over the past five years. Moreover, DBRS notes that the Company’s presence in Europe is being increasingly focused on Russia, which remains subject to growth and is projected to be the continent’s largest market by 2014.

In June 2011, Nissan announced a new medium-term business plan, “Nissan Power 88,” that features two broad strategic objectives: an 8% global market share by F2016 and sustained operating margins of 8%. Additional targets in support of the high-level objectives include the following: expansion of the Company’s product line: increased focus on growth markets, in particular the BRIC nations, and established leadership position in zero-emission electric vehicles (EVs). Nissan Power 88 also focuses on cost control, with the Company targeting total cost reductions of 5% per year. DBRS views Nissan’s high-level medium-term targets as somewhat aggressive, noting that the Company must prove particularly successful in emerging markets (which represent the predominant source of growth for the global industry going forward) in order to meet its objectives.

The ongoing Positive trend on the ratings reflects DBRS’s opinion that, upon the resolution of the territorial dispute between Japan and China, Nissan is likely to regain its prior sales momentum in the latter country. Moreover, Nissan’s future performance should also be bolstered by its product offensive (still in its initial stages) across global markets, which is expected to result in share gains and firmer pricing. Success in these areas would likely result in an upgrade of the ratings within the next six- to 12-month period. However, if the decline in Chinese sales remains significant and proves to be more than temporary and some of Nissan’s new models fall short of expectations (resulting in weakening of the Company’s margins), the trend on the ratings could revert to Stable.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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