DBRS Morningstar Confirms Toyota Motor Corporation at AA (low); Trend Remains Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Ratings of Toyota Motor Corporation (Toyota or the Company), Toyota Financial Services Corporation, and Toyota Credit Canada Inc. (TCCI) at AA (low). Additionally, DBRS Morningstar confirmed TCCI’s Medium-Term Notes and Commercial Paper at AA (low) and R-1 (middle), respectively. The trends on all ratings are Stable. The ratings incorporate Toyota’s solid business risk assessment as a leading global original equipment manufacturer with a strong presence in both mainstream and luxury automotive segments as well as a dominant position in its native Japanese market. Additionally, despite ongoing industry headwinds (ranging from the global semiconductor shortage, Coronavirus Disease (COVID-19), as well as rising interest rates and inflationary pressures), DBRS Morningstar estimates Toyota’s financial risk assessment (FRA) to remain well commensurate with the current ratings.

Toyota’s F2023 (ended March 31, 2023) earnings of its Automotive business remained essentially constant year over year, notwithstanding ongoing production constraints attributable to the global semiconductor shortage and coronavirus pandemic. The operating margin of the Automotive segment softened moderately to 6.4% (from 8.0% in F2022) with higher volumes, firmer product mix, and favourable foreign exchange (FX) effects being essentially offset by cost increases, notably higher raw material and labour costs. However, in Q1 F2024, earnings strengthened considerably compared with the similar prior year period in line with higher volumes (reflecting improvement in the semiconductor shortage amid favourable demand), firmer product mix, and pricing gains. While the Company’s profitability in China softened in line with difficult market conditions, DBRS Morningstar notes that Toyota’s regional performance proved quite resilient relative to its automotive peers. For F2024, the Company is projecting consolidated operating earnings in the amount of JPY 3.0 trillion (USD 24 billion); DBRS Morningstar deems Toyota’s forecast to be readily attainable.

Going forward, DBRS Morningstar notes the automotive industry faces meaningful cost headwinds over the next several years in line with the increasing electrification of vehicles (as a function of the tightening of emission regulations globally) amid ongoing investments in new mobility business initiatives. Toyota recently announced an updated strategic plan regarding the future development of its battery electric vehicles (EVs) and solid state batteries, in addition to hydrogen vehicles (mostly commercial vehicles) in selected markets. The Company remains well positioned to withstand these challenges given its (1) substantial liquidity position, with total liquid assets as of March 31, 2023, amounting to JPY 11.3 trillion (roughly USD 84 billion equivalent); (2) strong track record in efficiency gains, with new product development remaining focused on the Toyota New Global Architecture; and (3) established presence in electrified (i.e., EV and hybrid) models.

Consistent with the assigned Stable trends, the ratings are expected to remain constant over the near to medium term. DBRS Morningstar notes Toyota’s FRA, including its inordinately strong liquidity position, provides a cushion against unexpected challenges, rendering a downgrade unlikely. Conversely, an upgrade is not anticipated over a similar time horizon in line with the aforementioned cost headwinds facing the industry.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Toyota faces an assortment of laws and governmental regulations related to environmental matters such as emission levels, fuel economy, noise, and pollution. Accordingly, the Company faces risks from the transition to a lower-carbon economy. Toyota will need to respond to changes in customer demand trends by providing a diverse set of product options, taking into consideration region-specific electric power conditions. The Company is promoting its vehicle electrification strategy from all directions, including EVs, hybrid models, and fuel cell electric vehicles. In December 2021, Toyota announced its objective of increasing EV sales to 3.5 million units per year by 2030. Going forward, the Company plans to invest a total of approximately JPY 5 trillion in new capital expenditures, research and development expenses, and other investments relating to EVs and batteries.

While the Environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to Toyota.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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