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Fundamental View
AS OF 10 Jul 2024Honda continues to post impressive growth in its Automobile segment wholesale volumes and profitability following the normalization of its supply chain. While Motorcycle wholesale volumes remain pressured by weak economic conditions in Vietnam, volumes are increasing in most other regions. Honda posted significantly higher YoY profit in its automobile segment, supported by margin expansion from the motorcycle segment in its FY24 reporting. Management expects to lean into the increasing demand for hybrid vehicles by introducing a Civic hybrid this year that it expects should account for about 40% of the models’ sales in the U.S.
For additional information on Honda Motor Corporation see Honda Motor.
Business Description
AS OF 10 Jul 2024- Honda Motor Co., Ltd. engages in the manufacture and sale of automobiles, motorcycles, and power products. It operates through the following segments: Automobile, Motorcycle, Financial Services, and Power Product and Other Businesses. The Automobile segment manufactures and sells automobiles and related accessories. The Motorcycle segment handles all-terrain vehicles, motorcycle business, and related parts. The Financial Services segment provides financial and insurance services. The Power Product and Other Businesses segment offers power products and relevant parts.
- American Honda Finance Corporation (AHFC) is a wholly-owned subsidiary of American Honda Motor Co., Inc. (AHM or the Parent). Honda Canada Finance Inc. (HCFI) is a majority-owned subsidiary of AHFC. Non-controlling interest in HCFI is held by Honda Canada Inc. (HCI), an affiliate of AHFC. AHM is a wholly-owned subsidiary and HCI is an indirect wholly-owned subsidiary of Honda Motor Co., Ltd. (HMC). Honda Motor Co. (HMC) maintains Keep Well (support) agreements with its North American finance subsidiaries, AHFC and HCFI. Under the Keep Well agreements, HMC agrees to (1) maintain at least 80% ownership in AHFC and HCFI, (2) ensure AHFC and HCFI maintain a positive net worth, and (3) ensure both AHFC and HCFI have sufficient liquidity to meet their debt payment obligations.
Risk & Catalysts
AS OF 10 Jul 2024Management unveiled its FY25 guidance, including flat automobile wholesale volumes, and a modest increase of +5% YoY in global motorcycle volumes driven primarily by growth in Asia. Global automotive wholesales of 4.1 mn units anticipates incremental unit growth in North America and Japan, offsetting volume declines in Asia. Consolidated volumes are expected to increase modestly in FY25 while sales revenues are expected to decline 1% and operating profit is expected to increase 3% YoY as the positive impacts of elevated selling prices is expected to more than offset increased labor costs.
Changes in hybrid vehicle architecture, through increased design commonality, have resulted in increased power density and cost efficiency expected to continue improving through the decade’s end, supporting longer-term operating profit margins of 7%. Consolidated operating profit margins are expected to expand 20 bp to 7% in FY25 as the benefits of stronger pricing are expected to be nearly offset by increased warranty expense, greater R&D expenditures and currency headwinds.
Key Metrics
AS OF 10 Jul 2024$ mn | FY20 | FY21 | FY22 | FY23 | FY24 |
---|---|---|---|---|---|
Total Company Earning Assets | 73,397 | 76,778 | 71,105 | 65,363 | 74,626 |
Cash and Investments | 1,503 | 1,870 | 2,607 | 1,544 | 1,670 |
Excess Liquidity | 8,503 | 8,870 | 9,607 | 8,544 | 8,670 |
Unsecured Debt | 40,399 | 43,037 | 38,026 | 33,410 | 41,566 |
Secured Debt | 9,748 | 8,890 | 8,888 | 6,927 | 9,351 |
Total Debt | 50,147 | 51,927 | 46,914 | 40,337 | 50,917 |
Allowance % Retail Rece. | 1.07% | 0.75% | 0.58% | 0.71% | 0.80% |
Allowance / Net Charge-offs | 1.68x | 2.41x | 3.75x | 2.41x | 1.72x |
Net Charge-offs % Avg. Receivable | 0.63% | 0.33% | 0.15% | 0.29% | 0.52% |
30+ Day Delinquency Rate | 1.2% | 0.7% | 1.1% | 1.2% | 1.2% |
CreditSights View
AS OF 11 Jul 2024We are maintaining our Underperform recommendations on Honda Motor Co. (HMC) and American Honda Finance Corporation (AHFC) based on relative value, the company’s dominant position and resilient performance within the Motorcycle segment, expected sustained improvement within its Automobile segment performance in FY24, its EV strategy that lags most peers, and its excellent liquidity and stable credit rating.
Recommendation Reviewed: July 11, 2024
Recommendation Changed: January 13, 2023
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