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Fundamental View
AS OF 17 Mar 2023We expect the ratings of Honda and AHFC should be supported by strong profit generation from the company’s Motorcycle segment, despite weak Automobile segment performance as it struggles with supply chain challenges. We believe Honda and AHFC notes are fairly valued at a discount to notes of higher-rated Toyota and at a premium to notes of lower-rated Hyundai.
For additional information on Honda Motor Corporation see Honda Motor.
Business Description
AS OF 17 Mar 2023- 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. The company was founded by Soichiro Honda on September 24, 1948 and is headquartered in Tokyo, Japan.
- 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. Noncontrolling 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 17 Mar 2023North American buyers of the company’s moderately priced vehicles could be more susceptible to an economic downturn in 2023, which could weigh on the credit quality of AHFC’s loan and lease portfolio.
EV sourcing requirements included in the Inflation Reduction Act (IRA) are more favorable to domestic automakers and could blunt EV sales growth beginning in 2023, although management is working to limit the impact.
Management has not provided guidance for FY23 profit (ended March 31, 2023), although Honda Motor management expects its Financial Services segment to post FY23 operating profit that is 20% lower YoY as revenues come off of historic highs.
Key Metrics
AS OF 17 Mar 2023| $ mn | FY19 | FY20 | FY21 | FY22 | F3Q23 |
|---|---|---|---|---|---|
| Total Company Earning Assets | 73,231 | 73,767 | 77,066 | 71,316 | 64,696 |
| Cash and Investments | 795 | 1,503 | 1,870 | 2,607 | 2,350 |
| Excess Liquidity | 7,795 | 8,503 | 8,870 | 9,607 | 9,350 |
| Unsecured Debt | 40,964 | 40,399 | 43,037 | 38,026 | 33,254 |
| Secured Debt | 8,790 | 9,748 | 8,890 | 8,888 | 6,467 |
| Total Debt | 49,754 | 50,147 | 51,927 | 46,914 | 39,721 |
| Allowance % Retail Rece. | 0.55% | 1.06% | 0.74% | 0.58% | 0.69% |
| Allowance / Net Charge-offs | 1.03x | 1.68x | 2.41x | 3.75x | 2.41x |
| Net Charge-offs % Avg. Receivable | 0.56% | 0.63% | 0.33% | 0.15% | 0.29% |
| Delinquency Rate | 0.18% | 0.24% | 0.14% | 0.25% | 1.48% |
CreditSights View
AS OF 11 May 2023Our Underperform recommendation on Honda Motor and American Honda Finance notes is based primarily on relative value as we expect relatively tight trading levels to offer limited opportunity for outperformance. Honda Motor has struggled with supply chain challenges more than some of its automotive peers such as Toyota and Hyundai, which has contributed to constrained production and lower wholesale and retail light vehicle sales. We expect Honda’s automotive business performance to improve in 2023 as volumes improve, while its motorcycle unit continues to drive the majority of the company’s industrial operating profit.
Recommendation Reviewed: May 11, 2023
Recommendation Changed: January 13, 2023
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