DBRS Confirms Toyota Motor Corporation and Related Entities at AA (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the long- and short-term ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries at AA (low) and R-1 (middle), respectively, with a Stable trend. The ratings incorporate the Company’s very strong business profile as the leading global automobile manufacturer with highly efficient operations. Toyota’s financial profile is also inordinately strong, with abundant liquidity (significantly consisting of substantial holdings of long-term highly rated government bonds). Moreover, given fully resumed production capabilities, positive conditions in key markets (notably the United States, which is the Company’s largest single market) and a significant weakening of the Japanese yen (particularly vis-à-vis the U.S. dollar), Toyota’s earnings have effectively reverted to historically high levels.

DBRS expects the Company’s results to continue improving (albeit at a more moderate rate) through F2015 and over the medium term, given ongoing cost-cutting efforts amid global industry conditions that are projected to remain generally favourable. In the United States, growth will likely decelerate but nonetheless persist in 2015. Regarding Toyota’s native Japanese market (in which the Company dominates with market share exceeding 45%), industry volumes will likely remain essentially flat (though demand may be bolstered by the announced delay of the subsequent consumption tax increase to 2017). While conditions in Europe remain lacklustre, Toyota’s exposure to the region is, in any event, quite low relative to its peers. Conversely, Toyota is expected to benefit from its increasing presence in Asia’s emerging markets. In China, growth will likely moderate but nonetheless continue at annual rates in the approximate range of 6% to 8%, with Toyota looking to benefit from tightening emissions regulations, which should support sales of its fuel-efficient vehicles.

Toyota remains sensitive to the yen. DBRS notes that the Company’s Japanese-based production, relative to its global total, is significantly higher than that of its closest peers (although such production primarily consists of high technology/value-added models). Toyota is adopting measures to mitigate its sensitivity to such effects, including a more flexible domestic production system and increased sourcing from lower-cost countries. Going forward, however, while the yen will likely be positive to future results, the currency’s weaker level is now essentially factored into earnings and thus would not represent a significant tailwind to further profitability growth.

The Stable trend incorporates DBRS’s expectation that Toyota will maintain its very strong financial and business profiles. While DBRS recognizes that the Company’s dividends have increased (while still adhering to its public policy) and that share repurchases resumed in F2015, these outlays are expected to be readily absorbed by strong cash flow generation, with Toyota’s competitive position remaining well defended by its strong product cadence.

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 methodologies are Rating Companies in the Automotive Manufacturing Industry (November 2014), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013) and Global Methodology for Rating Finance Companies (October 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.