DBRS Upgrades Nissan Motor Co., Ltd. to A (low) & R-1 (low), Trend Now Stable

DBRS has today upgraded the long- and short-term ratings of Nissan Motor Co. Ltd. (Nissan or the Company) to A (low) and R-1 (low), respectively (from BBB (high) and R-2 (high)); in line with the upgrade, the trend on the ratings has also been changed to Stable from Positive. The rating action incorporates Nissan’s solid business profile as a major automotive original equipment manufacturer (OEM) of improving geographic diversity. DBRS notes that Nissan’s financial risk profile is also solid, with the automotive operations having a net cash position as of March 31, 2013, and the Company’s credit metrics well commensurate with the newly upgraded ratings. Nissan’s sales in its two most important markets, the United States and China, are expected to improve materially over the near term, reflecting new model introductions and ongoing industry growth (with sales in the latter also benefiting from the moderation of negative reactions toward Japanese-branded vehicles in China). Moreover, previously significant foreign exchange headwinds have notably subsided since the Japanese elections in late 2012, and the subsequent weakening of the yen should further bolster Nissan’s financial performance going forward.

Nissan’s ratings were previously on a Positive trend (originally assigned in November 2011), reflecting not only the Company’s strong credit metrics but also its increasing geographic diversification, including a growing presence in China, which is the world’s largest automotive market and – notwithstanding recent moderation – is expected to undergo further growth. DBRS acknowledges that Nissan encountered some challenges in the United States and China in fiscal 2012 (F2012, ending March 31, 2013). Accordingly, the Company’s ratings remained on Positive trend last year (for details please refer to DBRS’s press release dated November 30, 2012), with a potential ratings upgrade contingent on progress being made in the above-cited markets. DBRS also notes that despite these challenges, Nissan’s earnings performance was nonetheless only slightly weaker year-over-year, with operating margins remaining consistent with industry norms and the Company’s automotive operations generating significant net free cash flow.

The Company’s progress in China stalled last year due to a territorial dispute involving Japan over a series of islands in the region that prompted local consumers to shun vehicles produced by the Japanese OEMs. At its worst, during September and October 2012, Nissan’s monthly deliveries in China declined by 35% and 41%, respectively, year-over-year. Over the entire 2012 calendar year, given firmer volumes prior to the dispute, the decrease in unit sales was a moderate 5.3% relative to 2011. Moreover, the decline in Nissan’s Chinese sales through early 2013 continued to diminish, whereas for April 2013, monthly unit sales were nominally higher year-over-year. As such, Nissan’s business in China is recovering; while market share has yet to reach historically high levels, the Company expects share to fully rebound by the fourth quarter of 2013.

Nissan’s performance in North America through F2012 was also somewhat below the Company’s expectations; however, this was primarily due to internal supply issues (curtailing the availability of new models) that have since been significantly addressed. DBRS notes that Nissan’s current product cadence is particularly favourable, with recent redesigns of several core models including the Altima, Pathfinder and Sentra. Buoyed by the full availability of these new vehicle models, Nissan’s U.S. monthly sales for April and May 2013 increased by more than 23% and 25%, respectively, year-over-year.

In line with the above, Nissan’s sales and profitability in F2013 are expected to improve materially, in line with its strong product cadence amid generally favourable conditions across key markets. Although Europe’s automotive industry continues to operate in severe conditions – reflecting economic challenges 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 is projected to be the continent’s largest market over the near to medium term.

DBRS also notes that the yen, which had come to represent a significant and increasing headwind for the Company (particularly from 2008-2012), has weakened materially since the Japanese elections in late 2012. As of the end of May 2013, the yen/U.S. dollar exchange rate (JPY/USD) was at level of 100:1, which is significantly above the JPY/USD exchange rate of approximately 80:1 that prevailed in mid-November 2012 (prior to the last elections). As Nissan estimates that its profitability increases by approximately 15 billion yen for each yen depreciation vis-à-vis the U.S. dollar, the weaker yen is projected is significantly bolster the Company’s earnings in F2013.

In June 2011, Nissan announced a new medium-term business plan, “Nissan Power 88,” which 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 establishing a leadership position in zero-emission electric vehicles. 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 these objectives.

The Stable trend on the ratings incorporates DBRS’s expectation that Nissan will maintain its strong financial and business risk profiles, reflecting generally favourable conditions across its key markets as well as a materially weaker Japanese yen that should no longer represent a significant headwind for the Company (and, in the opinion of DBRS, may in fact prove a slight tailwind). Moreover, Nissan’s competitive position is expected to be well defended by the recent launches of some core models and resulting strong product cadence.

Notes:
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.