Morningstar DBRS Confirms Honda at A (high); Trends Remain Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Honda Motor Co., Ltd. (Honda or the Company) at A (high). Concurrently, Morningstar DBRS confirmed the Senior Unsecured Debentures and Commercial Paper credit ratings of Honda Canada Finance Inc. at A (high) and R-1 (middle), respectively. The trends on all credit ratings remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings reflects Honda's sound business risk assessment (BRA) as an automotive original equipment manufacturer (OEM) of moderate scale, albeit with strong technological capabilities. Moreover, recent financial earnings performance has been bolstered by the stronger earnings of the Company's Automobile segment in line with ongoing firm demand (notably in North America) amid a recovery in production volumes. Moreover, Honda's credit ratings remain underpinned by its robust financial risk assessment (FRA), with the Company's industrial operations having a sizable net cash position (i.e., industrial cash balances exceeding indebtedness) and substantial available liquidity.

CREDIT RATING DRIVERS
Morningstar DBRS sees limited potential for positive rating actions given the high level of the Company's current credit ratings (compared with the industry average), further noting Honda's moderate scale relative to the world's largest OEMs. Conversely, future earnings underperformance and an associated cash burn resulting in a meaningful weaking of credit metrics could potentially lead to negative rating actions. Finally, with respect to the December 23, 2024 announcement of Honda and Nissan Motor Co., Ltd. (Nissan, rated BBB (low) with a Stable trend) indicating that they have agreed to begin discussions and consideration toward a business integration (the Business Integration), Morningstar DBRS notes that the credit ratings of both Honda and Nissan would likely be placed Under Review with Developing Implications upon the companies reaching a definitive agreement regarding the Business Integration.

EARNINGS OUTLOOK
For fiscal 2025 (F2025, ending March 31, 2025), Morningstar DBRS expects Honda's earnings to remain in line with (i.e., ranging from essentially flat to slightly lower year over year (YOY)) very solid F2024 levels, with positive sales volume and product mix effects being essentially offset by cost headwinds, including higher labour costs and increased research and development (R&D) expenses (in addition to moderately negative foreign exchange effects). We note, however, that equity income from Honda's Chinese joint ventures (JVs) is likely to remain under pressure over the medium term amid increasing local competition. Going forward, the Company is targeting ongoing efficiencies in its Automobile operations through its Honda Architecture initiative, with streamlined model allocation/trim variations also contributing to cost reductions. Honda is also attaining higher profitability through its hybrid vehicle product offerings, with the profitability of the Company's hybrid models essentially matching that of its internal combustion engine (ICE) models. Consistent with its peers, given tightening emissions regulations across most global jurisdictions (notwithstanding recent developments in the United States), Honda faces increasing costs stemming from the progressive electrification of the automotive sector. Accordingly, while Morningstar DBRS estimates the Company's earnings will benefit from business growth (unit sales and product mix) and planned efficiencies, this will likely be partly offset by the higher product and development costs.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates that Honda's cash flow from operations in F2025 will slightly moderate YOY, albeit remain at solid levels. The Company forecasts capital expenditures (capex) and dividend payments will increase significantly YOY. As such, free cash flow will be lower YOY, albeit while remaining substantially positive. This notwithstanding, Morningstar DBRS estimates that Honda's ongoing electrification investments will remain readily internally funded. Morningstar DBRS acknowledges that, in addition to the increasing capex and dividends, Honda also recently announced a sizable share buyback program of up to JPY 1.1 trillion (~ $7 billion) from January to December 2025. Morningstar DBRS notes, however, that the Company's recent (industrial) cash balances were at inordinately high levels amid progressively firmer earnings, with cash balances estimated to revert to essentially historical norms after the share buybacks. Accordingly, Honda's FRA is expected to remain at very strong levels, providing a slight cushion in the context of the current credit ratings.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): AL
Honda's CBRA is supported by its solid position in key regional markets, notably the United States and Japan, with the Company's core nameplates also being highly established in their respective vehicle segment categories. Moreover, the Motorcycle and Financial Services businesses provide meaningful diversification benefits.

Comprehensive Financial Risk Assessment (CFRA): AAH
The Company's CFRA reflects its consistent earnings and cash flow generation, strong balance sheet, and conservative financial policy.

Intrinsic Assessment: AH
The Intrinsic Assessment (IA) is based on the aforementioned CFRA and CBRA. Taking into considerations peer comparisons, among other factors, we place the IA in the middle of the Intrinsic Assessment Range.

Additional Considerations: None
Honda's Issuer Rating includes no further negative or positive adjustments due to additional considerations.

Finally, in the key U.S. market, regarding the possibility of tariffs being imposed by the Trump administration on automotive imports from Canada and Mexico, Morningstar DBRS notes that Honda remains relatively well positioned to manage such developments. While the Company has automotive production facilities in Canada and Mexico of a combined estimated annual production capacity of roughly 620 thousand units, this is more than offset by Honda's U.S. annual production capacity (with assembly plants in Marysville, Ohio, and Lincoln, Alabama) that is estimated to exceed 800 thousand units. Accordingly, Honda has the option to allocate additional production to its U.S. facilities. Morningstar DBRS also notes that the Company's pricing power is quite favourable, with Honda having some flexibility to pass on associated cost increases to vehicle purchasers. As such, and further taking into account Honda's strong financial profile, any imposition of such tariffs would have no immediate impact on its credit ratings.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/447457.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis: Morningstar DBRS considered that the environmental factor related to carbon and greenhouse gas emissions represents a relevant factor as Honda is subject to a wide range of environmental compliance requirements relating to CO2, fuel efficiency, emissions control, and other factors. The Company is committed to achieve carbon neutrality by 2050, with electrification as its main pillar. In the event Honda cannot comply with applicable regulations, significant penalties and reputational harm could result. Moreover, such risks could significantly affect the Company's mid- and long-term initiatives, particularly regarding further electrification of its products. Accordingly, Honda is targeting research and development expenses and investments of JPY 10 trillion in electrification and software over the next 10 years (from F2022) (For further details, please refer to the following commentary: The Future is Electric: Climate Change and the Global Automotive Sector at https://dbrs.morningstar.com/research/413419.)

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Morningstar DBRS notes that the above press release was amended on February 10, 2025, to incorporate the correct rating scores for the CBRA, CFRA and IA, as well as the link to the IA Framework disclosure.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025), https://dbrs.morningstar.com/research/447185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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