DBRS Morningstar Changes Trends on Honda Motor Co., Ltd. to Stable from Negative, Confirms Ratings at A (high)

DBRS Limited (DBRS Morningstar) changed the trends on Honda Motor Co., Ltd.’s (Honda or the Company) Issuer Rating and Senior Unsecured Debentures ratings to Stable from Negative and confirmed both ratings at A (high). Concurrently, DBRS Morningstar changed the trends on Honda Canada Finance Inc.’s Senior Unsecured Debentures and Commercial Paper ratings to Stable from Negative, while confirming the ratings at A (high) and R-1 (middle), respectively. The rating actions reflect the Company’s strong business risk assessment as an automotive original equipment manufacturer (OEM) with moderate global scale but strong technological capabilities, Honda also deriving diversification benefits from its Motorcycle and Financial Services operations. While DBRS Morningstar recognizes that the Company’s operating performance has softened over the past few fiscal years (results in F2021, ended March 31, 2021, significantly reflecting the global progression of the Coronavirus Disease (COVID-19) pandemic), going forward DBRS Morningstar expects Honda’s earnings to trend positively for the foreseeable future in line with anticipated volume growth and projected efficiency gains. Moreover, reflecting the Company’s very conservative financial policy, Honda’s financial risk assessment remains strong and commensurate with the currently assigned ratings.

In H1 2022, Honda’s main industrial segments (Automobile and Motorcycle) generated higher earnings (compared with the similar prior year period) in line with unit sales growth and efficiency gains. These positive factors more than offset headwinds in the form of higher raw-material costs and the semiconductor shortage. Consolidated earnings remained supported by the solid performance of the Financial Services business, significantly reflecting favourable residual value performance caused by the ongoing strong pricing of used vehicles. While industrial earnings performance is expected to moderate in H2 2022, primarily as a result of the semiconductor shortage and other supply-base challenges, the Company is projecting its F2022 consolidated operating earnings to be moderately higher year over year in the amount of JPY 800 billion (USD 7.0 billion equivalent), DBRS Morningstar deeming Honda’s forecast well attainable.

Subsequent to F2022, the Company's earnings are expected to benefit from ongoing demand growth (with DBRS Morningstar anticipating industry demand in 2023 to revert to pre-pandemic levels) and efficiency gains, the latter incorporating the increasing application of the Honda Architecture (the Company’s global vehicle platform) and further streamlining of available models and trims. While Honda, consistent with its peers, is pursuing the progressive electrification of its automotive fleet, the Company is targeting increased participation in joint projects and alliances with other OEMs to help moderate associated cost headwinds.

DBRS Morningstar expects the Company’s ratings to remain constant over the near to medium term. DBRS Morningstar sees limited potential for positive rating actions given the high level of the current ratings (compared with the industry average), further noting Honda’s moderate scale relative to the world’s largest OEMs. While future earnings underperformance and associated cash burn could potentially result in negative rating pressure, DBRS Morningstar considers this scenario unlikely.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Japanese yen unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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