Toyota and its subsidiary issuers are the highest quality Automotive sector issuers in the dollar market with A1/A+/A+ S/S/S ratings and outlooks by Moody’s, S&P, and Fitch, respectively. Toyota’s automotive credit metrics are strong with cash and cash equivalents roughly 1.7x its debt balance. We believe its credit rating is stable with potential upside by S&P over time as the rating agency had Toyota’s rating at AA- prior to the pandemic. However, management has not indicated it aspires to a higher rating, and we note it currently has access to the Tier 1 CP market, which provides it with short-term funding flexibility.

Although Toyota’s production volumes improved 11% sequentially during F2Q23, management lowered its FY23 production growth target from 13% to 7% due to unpredictable supplies of semiconductors and other components. It also reduced its wholesale target by 50k to 8.8 mn units, lowering its growth target from 8% to 7%.

The company announced in August it plans to build EV battery plants in Japan and the U.S., with production slated to begin in 2025. The investments imply a shift in the company’s strategy from a focus on hybrids to a more aggressive focus on EVs. Capex is up 28% YTD and management raised its full-year capex guidance to an increase of 29% versus its previous target of a 19% increase. We expect the company to generate positive free cash flow after capex in FY23 and to use its free cash flow to fund dividends and share repurchases.

While management reiterated its expectation for a 20% YoY decline in consolidated operating profit in FY23, we expect 2H23 consolidated operating profit to improve YoY on easing supply chain challenges, improved production and wholesale volumes, and favorable currency.