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 automotive models very well-positioned to benefit from the structural shift toward more fuel-efficient vehicles. DBRS also notes that Honda enjoys modest diversification benefits from its motorcycles segment (where the Company is a global leader) and financial services operations. Honda’s financial profile continues to be solid, as credit metrics remain well commensurate with the assigned ratings and the Company’s industrial operations maintain a significant net cash position. The trend on the ratings is Stable, reflecting Honda’s solid product cadence amid global industry conditions that are expected to be generally favourable, despite considerable headwinds across certain major developed markets, such as Europe.

Honda’s results in fiscal 2012 (F2012, ending March 31, 2012) were weak, particularly in the first half, primarily due to extensive production interruptions (and associated vehicle shortages) attributable to the Great East Japan Earthquake and subsequent flooding in Thailand. However, while the core automotive segment incurred moderate losses, these were offset by earnings generated by the motorcycles and financial services segments, with Honda remaining modestly profitable on a consolidated basis. As expected by DBRS, the Company’s results improved significantly through the twelve-month period ending September 30, 2012, as Honda progressively resumed its production capabilities, with the Company’s results further bolstered by favourable conditions in Honda’s two major automotive markets, the United States and Japan, which together typically account for close to two-thirds of total vehicle sales.

In the United States, the Company’s sales in the first half of F2013 (as well as through the remaining three months of calendar 2012) improved sharply, in line with replenished inventory levels. DBRS notes that the Company’s annual market share in the United States in 2012 increased by close to a full percentage point, amounting to 9.8% as of December 2012 (vis-à-vis 9.0% through 2011). Moreover, the Company also benefited from the ongoing recovery of automotive conditions, as industry light vehicle sales volumes in the U.S. grew to 14.5 million units, an increase of 13% relative to the 2011 level of 12.8 million units. In Japan, Honda’s revenues through the first half of F2013 increased by 57% year-over-year, as demand progressively recovered following the adverse effects of the Great East Japan Earthquake, with sales further bolstered by government incentive programs toward the purchase of fuel-efficient vehicles (these programs, however, expired in September 2012).

DBRS expects the Company’s results to continue improving through F2013 going forward, in line with generally favourable global conditions. While demand in Japan will fall in response to the expiry of the government incentive programs, the decline is expected to be controlled and moderate (significantly reflecting progressively changing demographic trends in the country that are undermining vehicle demand). In the United States, the recovery of the automotive sector continues to well exceed that of the general economy; growth is expected to remain solid this year, with industry volumes in 2013 projected to exceed 15 million units as demand progressively reverts to secular trend levels. In other markets, while Europe is projected to remain weak, Honda’s exposure to this region is significantly less, relative to other major geographic market segments. Conversely, the Company is expected to benefit from its increasing presence in Asia’s emerging markets, with its performance expected to be solidly in line with the projected growth of the global automotive industry.

DBRS notes that Honda’s performance will also likely benefit from the Company’s relatively fresh product cadence. Honda recently introduced an all-new revised Accord, which has traditionally been the Company’s most profitable model and has thus far received positive reviews. Furthermore, the Company also significantly revised its Civic model (just two years following its initial introduction). The updated CR-V was launched just one year ago, with this model continuing to generate very strong sales. As such, three of the Company’s four core models – Accord, Civic, CR-V and Fit (which, combined, represented 75% of Honda’s total unit sales in 2011) – are very current, with the next generation Fit to be progressively rolled out within two years. This should help the Company defend its market share and possibly achieve modest gains, notwithstanding stronger competition.

DBRS notes that Honda is not a prominent global automotive original equipment manufacturer (OEM), with its scale approximately half that of the largest global auto manufacturers. Moreover, Honda is also involved in relatively few joint-venture activities vis-à-vis its nearest competitors. As such, the Company’s research and development (R&D) expenses have historically been high relative to the industry average, although DBRS notes that Honda has been able to readily absorb these investments while continuing to generate quite favourable earnings.

The persistent strengthening of the Japanese yen has been a significant headwind for the Company. However, DBRS notes that Honda remains somewhat better positioned in this regard than its Japanese peers, given its relatively higher localized production, with Japanese production currently estimated to represent less than 25% of global production. Going forward, the Company aims to further increase both localized production and component sourcing, in line with expected capacity increases in emerging Asian markets and a forthcoming plant in Mexico. Moreover, DBRS also notes that the yen has moderated considerably since late 2012, following the results of the recent Japanese elections.

The Stable trend of the ratings incorporates DBRS’s expectations that Honda will maintain its strong financial and business profiles, with its competitive position well-defended by the recent launches/revisions of some core models, with Honda’s product cadence being strong across key global markets.

Notes:
All figures are in Japanese Yen 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, which can be found on our website under Methodologies.