DBRS Confirms Nissan Motor Co., Ltd. at A (low) & R-1 (low), Trend Stable

DBRS has today confirmed the long- and short-term ratings of Nissan Motor Co., Ltd, (Nissan or the Company) at A (low) and R-1 (low), respectively. The confirmation recognizes the Company’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, 2014, and the Company’s credit metrics well commensurate with the assigned ratings. The trend on the ratings is Stable. DBRS expects Nissan’s earnings performance over the near to medium term to remain firm as a function of the Company’s product offensive and forthcoming capacity expansion amid global industry conditions that in aggregate would appear to be rather favourable.

Nissan’s profitability in F2013 (ending March 31, 2014) improved year over year on an equivalent basis (i.e., proportionate consolidation of its Chinese joint venture), in line with higher volumes as the Company moderately outperformed the global industry. Moreover, profitability was further bolstered by foreign exchange tailwinds and ongoing cost reduction activities. DBRS expects Nissan’s profitability to persist at solid levels going forward, in line with ongoing anticipated efficiency gains and additional volume increases, as the global automotive industry (notwithstanding some headwinds in certain regional markets) seems poised to undergo additional growth for the foreseeable future.

One notable exception to the above is Nissan’s native Japanese market where volumes are likely to prove constrained for the foreseeable future. Over the near term, sales are likely to be adversely affected by the recent increase in the country’s consumption tax that came into effect in April of this year, while longer-term prospects remain dampened by changing demographic trends in the country that are undermining vehicle demand.

However, the challenges in Japan will likely be more than offset by expected tailwinds across many of Nissan’s other major geographic market segments. In China, it would appear that Nissan has mostly recovered from the previous negative reaction of local consumers toward Japanese-brand vehicles (owing to a territorial dispute between the two nations over a series of islands in the region). While the Company’s sales in China remained lackluster in the first half of 2013, demand subsequently recovered such that Nissan’s total annual sales increased by 17% year over year, thereby outpacing the regional industry and resulting in a moderate gain in share for the Company in this vital market. In North America, Nissan’s sales performance was also solid as shares in the important U.S. market improved materially to 8.2% from 7.7% the prior year, in line with positive market reaction to revisions of the Pathfinder and Rogue models amid ongoing firm sales of the Altima mid-sized sedan. In Europe, Nissan’s market share remained essentially flat, although DBRS notes that the Company is considerably less exposed to this continent than many of its peers. Within Europe, however, one market that the Company has been placing additional focus on in recent years is Russia, which faces considerable headwinds given the current political turmoil stemming from the Ukraine crisis, although medium- to long-term growth prospects would appear to remain quite positive.

Nissan appears to be well positioned to benefit from the industry dynamics outlined above, with the Company slated to introduce several new models in the near term, including, among others, a redesigned Nissan Murano crossover utility vehicle, an electric version of the NV200 van and an all-new global pick-up truck. The Company also has significant additional capacity coming online through new plants in countries such as Brazil, China and Mexico. DBRS notes that the additional capacity is effectively concentrated in emerging markets, which are expected to represent the majority of the global automotive industry’s growth going forward.

In addition to its improving product cadence and increasing capacity, the Company is also progressing in the implementation of its brand strategy. With the Nissan brand being firmly entrenched among mass market automotive brands, the Company is striving to attain further separation between Nissan and the premium Infiniti brand through forthcoming Infiniti product introductions that will place a greater emphasis on performance. To this end, the Company is developing a new platform with Daimler AG that will spawn several forthcoming models. Moreover, in emerging markets, the Company will introduce numerous all-new Datsun vehicles, with the recently reintroduced Datsun serving as an entry-level brand in these regions.

The Company remains committed to its “Nissan Power 88” mid-term plan (announced in June 2011) that outlines 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 (Brazil, Russia, India and China); and establishing a leadership position in zero-emission electric vehicles. DBRS notes that Nissan would appear to be on track with respect to several of its targets, although the global market for electric vehicles has thus far proven smaller than previously anticipated by the Company. Moreover, the global market share objective of 8% remains perhaps somewhat aggressive given Nissan’s share of 6.2% as of F2013, with the Company needing to be particularly successful in emerging markets going forward to meet this target. (DBRS acknowledges that the Company’s operating margin target is of a higher priority than its market share objective.)

Nissan’s profitability remains highly sensitive to the value of the Japanese yen given a large production base in Japan and associated exports to other markets. After representing a significant headwind for several consecutive years, the Company’s recent earnings benefitted substantially from the weakening of the currency subsequent to the Japanese elections in late 2012. However, this benefit is likely to prove short lived as Nissan expects foreign exchange effects to prove moderately negative to its earnings performance in F2014. The Company’s increasing localized production across primarily emerging markets should help moderate Nissan’s sensitivity the yen going forward.

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 (with the exception of its native Japan). Moreover, DBRS expects Nissan’s competitive position globally to strengthen moderately, in line with the Company’s improving product cadence, increasing geographic diversity and progressive implementation of its developing brand strategy.

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 Manufacturing Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.