Fundamental ViewAS OF 17 Mar 2023
Honda is unique among its Automotive peers owing to its global leadership position within the motorcycle market, in which it maintains a 25% global market share and consistent low-double-digit operating margins. The larger automotive business – which accounts for roughly two-thirds of Honda’s consolidated revenue – has seen its profitability decline since 2017 and remains in turnaround mode.
While we believe its credit rating has upside potential to mid-A over time – its longtime rating prior to the pandemic that would enable it to access the Tier 1 CP market – we do not expect positive rating momentum until the automotive supply chain normalizes and Honda improves the performance of its automotive segment.
Business DescriptionAS 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 & CatalystsAS OF 17 Mar 2023
Management raised its FY23 guidance for Motorcycle unit wholesales, lowered its Automobile unit wholesales and net revenue, while reiterating its guidance for operating profit, and net income. Honda’s Motorcycle unit wholesales growth forecast was boosted by 2% and the new target now represents a 10% YoY increase. Its Automobile unit wholesale target was lowered 6%, with the reduction driven by lower expectations in most regions, especially Asia. The company’s new Automobile wholesale target represents a 5% YoY decline, although management expects to inflect to growth of 3% YoY in F4Q23.
Honda’s FY23 consolidated operating profit guidance of ¥870 bn is unchanged from its previous guidance, although it now expects the full-year contribution from currency to be slightly lower, offset by modestly improved price/cost impacts and lower warranty and R&D costs. We expect Automobile segment profit to improve sequentially and YoY in F4Q23 as wholesale volumes improve and the pricing environment remains relatively firm.
Key MetricsAS OF 17 Mar 2023
|¥ bn||FY19||FY20||FY21||FY22||LTM F3Q23|
CreditSights ViewAS OF 18 May 2023
Our 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 18, 2023
Recommendation Changed: January 13, 2023