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Sector: Manufacturing
San Miguel Corporation
- Sector: Manufacturing
- Sub Sector: Diversified Conglomerates
- Country: Philippines
- Region: Philippines
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): O/P
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Fundamental View
AS OF 16 May 2023SMC holds a dominant market position in various sectors of the Philippine economy, has a long operating track record, and a diversified business profile that provides greater earnings resilience.
SMC incurs significant capex, particularly in its power/energy and infrastructure businesses. This could keep SMC’s credit metrics elevated and free cash flows negative.
We remain concerned about the weak credit profile of its power arm SMC Global Power (SMC GP), and see heightened extension/refinancing risk for its $3.3 bn of perpetual bonds that are first callable in 2024-2026.
Business Description
AS OF 16 May 2023- SMC is a massive conglomerate in the Philippines with business interests across six business segments: Food & Beverage (F&B), fuel refining and retailing, power, packaging, infrastructure, and others.
- Its F&B business is operated through San Miguel Food & Beverage, the largest F&B company in the Philippines with three main divisions: Beer and Non-alcoholic Beverage (including beers and juices), Spirits (gin and Chinese wine), and Food (including packaged foods, animal feeds, poultry and fresh meats).
- SMC’s fuel refining and retailing business is operated through Petron Corporation (~68% stake), the largest oil refining and retailing company in the Philippines, and one of the largest in Malaysia. Petron has a total refining capacity of ~268k barrels/day.
- SMC’s power business is operated through SMC Global Power Holdings (SMC GP, 100% stake), one of the largest power generating companies in the Philippines. It maintains a diversified portfolio across coal (62%), natural gas (26%), and renewable energy (12%) sources.
- Through its packaging business, it manufactures glass containers, plastic crates, pellets, bottles and caps, aluminium cans, and other types of packaging products.
- It operates its Infrastructure business through San Miguel Holdings Corp (SMHC), in which it holds a 100% stake. It currently operates ~190 km of toll roads in the country, connecting high-traffic, arterial routes in Luzon.
Risk & Catalysts
AS OF 16 May 2023SMC’s revenues are concentrated in the Philippines (~80%), which poses geographical concentration risk.
SMC incurs significant capex, particularly in its power/energy and infrastructure businesses. In October 2020, SMC began construction of the mega New Manila International Airport (requires ~PHP 750 bn of capex spread over 5-7 years). This could keep SMC’s credit metrics elevated and free cash flows in negative territory.
As a holding company, SMC is reliant on dividend upstreaming from its operating subsidiaries to service its debt, which can be difficult should the operating subsidiaries face cash flow difficulties. We are particularly concerned about SMC GP’s weak financial profile and extension/refinancing uncertainties of its $3.3 bn perpetuals that are first callable from 2024-2026.
SMC operates in the businesses of thermal power generation and fuel refining, which may be looked at unfavourably by some ESG-focused investors.
Key Metrics
AS OF 16 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 65.2% | 66.4% | 72.3% | 66.6% | 70.9% |
| Net Debt to Book Cap | 46.7% | 51.7% | 58.5% | 51.9% | 60.0% |
| Debt/Total Equity | 187.0% | 197.9% | 261.3% | 199.1% | 243.9% |
| Debt/Total Assets | 64.1% | 65.7% | 69.8% | 65.4% | 68.0% |
| Gross Leverage | 10.9x | 8.1x | 9.1x | 7.8x | 8.8x |
| Net Leverage | 7.8x | 6.3x | 7.4x | 6.1x | 7.4x |
| Interest Coverage | 2.1x | 3.1x | 2.8x | 3.3x | 2.4x |
| EBITDA Margin | 15.5% | 17.6% | 12.2% | 14.7% | 12.3% |
CreditSights View
AS OF 16 May 2023We have a Market perform recommendation on SMC. SMC’s Jul-2025 perp (mid-YTW: 10.1%) trades 400 bp wider than Ayala Corp’s c.Oct-2024 perp (mid-YTW: 6.1%), which we think is fair given SMC’s poorer net leverage (7.4x vs. 6.6x), worse liquidity position and heightened extension/refinancing risk of subsidiary SMC GP’s $3.3 bn of perps that negate SMC’s larger scale of EBITDA. We like SMC’s dominant market position in multiple sectors, long operating track record and diversified operations. Yet we acknowledge it incurs sizable capex that would likely keep its credit metrics elevated and free cash flows negative. We are also concerned about how SMC GP intends to refinance its wall of perps that are first callable in 2024-2026, which we think will be aided largely by parental support from SMC.
Recommendation Reviewed: May 16, 2023
Recommendation Changed: April 05, 2023
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Search topics about wealth insights and investments.Reliance Industries
- Sector: Manufacturing
- Sub Sector: Diversified Conglomerates
- Country: India
- Region: India
- Bond: RILIN 4.125 25
- Indicative Yield-to-Maturity (YTM): 5.531% (Indicative as of March 2)
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): Baa2 / BBB+ / -M/P
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Fundamental View
AS OF 09 May 2023Reliance Industries (RIL) is positioned as India’s largest company by revenues, profits and exports. It enjoys a large, diversified scale of operations and dominates various key sectors (refining, petrochemicals, retail and telecom), which allow for earnings resilience.
RIL also plans to ramp up its presence in the renewable energy space, which could provide the next leg of growth and improve its ESG perception.
RIL incurs significant capex, particularly from heavy investments in 5G telecom and the renewables space (~INR 750 bn over the next 3 years). This has weighed on its free cash flow generation, though we acknowledge RIL’s historically prudent financial management and robust credit metrics that provide ample elbowroom for some credit profile deterioration.
Business Description
AS OF 09 May 2023- RIL is an Indian diversified conglomerate engaged in oil & gas refining, marketing, petrochemicals, organized retail, telecom and digital services, amongst others. It is the largest company in India by revenue, profits, exports and market capitalization (INR 14 tn).
- It is the second largest refiner in India and produces petroleum products such as petrol, high-speed diesel (HSD), aviation turbine fuel (ATF), LPG and lubricants.
- It is the largest petrochemicals producer in India, boasting production of ~38 mn tons in FY20. Through its integrated Jamnagar refinery complex, it produces Polymers/Plastics, Elastomers (synthetic rubber) and Polyester products.
- It is the largest retailer in India in terms of revenue. It operates 16.6k stores (as of September 2022) to sell products ranging from consumer electronics, fashion and lifestyle, grocery, petrol retail and telecom and digital services. It launched its online retail channel, 'JioMart', in December 2019.
- Reliance Jio is the largest mobile telecom operator by subscriber base (426 mn as of March 2021) in India and boasts the widest 4G wireless network in the country.
- In 2021, RIL announced investments to the tune of INR 750 bn/ $10 bn (for next 3 years) to build a renewable energy ecosystem which will include 4 giga factories. Set to be located in Gujarat, the factories will produce solar modules, hydrogen, fuel cells and battery grid to store electricity. Long-term goals also include building 100 GW of PV solar plants by 2030.
Risk & Catalysts
AS OF 09 May 2023RIL’s O2C (oil-to chemicals) business margins have been under pressure owing to the squeeze in key downstream chemical product margins (i.e. an absolute decline in product prices vs. feedstock prices), which impacted polymer and aromatics margins.
RIL incurs significant capex, particularly from heavy investments in 5G telecom and the renewables space (~INR 750 bn over the next 3 years). This has weighed on its free cash flow generation, though we acknowledge RIL’s historically prudent financial management and robust credit metrics that provide ample elbowroom for some credit profile deterioration.
RIL faces key-person risk; 65-year old Chairman Mukesh Ambani has begun to hand over the reins of RIL’s different business divisions to his children.
Key Metrics
AS OF 09 May 2023| INR bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 42.4% | 43.0% | 24.6% | 24.1% | 26.4% |
| Net Debt to Book Cap | 40.8% | 39.2% | 22.9% | 21.0% | 20.5% |
| Debt/Total Equity | 73.6% | 75.5% | 32.5% | 31.7% | 35.9% |
| Debt/Total Assets | 29.0% | 29.9% | 19.7% | 18.8% | 19.6% |
| Gross Leverage | 3.4x | 3.9x | 3.2x | 2.6x | 2.3x |
| Net Leverage | 3.2x | 3.5x | 3.0x | 2.2x | 1.8x |
| Interest Coverage | 3.3x | 3.2x | 3.1x | 5.7x | 7.3x |
| EBITDA Margin | 14.8% | 14.7% | 16.6% | 15.3% | 16.0% |
CreditSights View
AS OF 21 Jun 2023We have a Market perform recommendation on RIL. We think RIL’s bonds trade fairly to similarly rated Indian peers Bharti Airtel and BPCL. We like RIL’s large, diversified scale of operations and dominant market shares in key sectors (refining, petrochemicals, retail and telecom) that allow for earnings resilience. RIL also plans to ramp up its presence in the renewable energy space, which could provide the next leg of growth and improve its ESG perception. While we remain aware of RIL’s elevated capex needs could persist over the next 2-3 years, we think the impact is mitigated by RIL’s historically prudent financial management and healthy credit metrics that provide ample elbowroom for some credit profile deterioration.   Â
Recommendation Reviewed: June 21, 2023
Recommendation Changed: June 30, 2021
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Fundamental View
AS OF 17 Mar 2023Business Description
AS OF 17 Mar 2023- Hyundai Motor Co., Ltd. engages in the manufacture and distribution of motor vehicles and parts. It operates through the following business areas: Vehicle, Financial and Others. The Vehicle division offers motor vehicles. The Financial division provides financing, leasing and credit cards. The Other division includes manufacture of railways. The company was founded on December 29, 1967, and is headquartered in Seoul, South Korea.
- Hyundai Capital America benefits from a support agreement with Hyundai Motor (HMC). HCA investor relations confirmed its support (keepwell) agreement contains a fixed charge coverage provision that it views as particularly strong compared to other peers. HCA’s support agreement stipulates that HMC will make cash contributions to HCA if the fixed charge coverage is below 1.1x, allowing the company to mitigate the impact on capital from losses. Key provisions of the support agreement listed in the business update include (1) HMC agrees it, its controlled subsidiaries, and entities subject to joint control, will own 100% of HCA, (2) HMC will cause HCA and its subsidiaries to maintain positive consolidated tangible net worth, (3) HMC will take all necessary actions to ensure HCA maintains a minimum Fixed Charge Coverage of 1.1x, and (4) Third-party enforceability rights.
Risk & Catalysts
AS OF 17 Mar 2023- Management targets consolidated revenue growth of 10.5% to 11.5% in FY23, driven by higher wholesale volumes and an increase in average selling prices related to improving mix. Its FY23 consolidated operating margin target of 6.5% to 7.5% compares to 6.9% in FY23 and should benefit from high plant capacity utilization (96.8% in 4Q22) and mix. At the same time, management called out expected margin headwinds including limited global demand growth, sales incentive normalization, and market uncertainties such as currency and interest rate hikes.
- We estimate the combination of revenue growth and low end of its operating margin target would yield profit growth in FY23 in the mid-single-digit range. The increase in margin dilutive eco-friendly vehicle sales from 5% of global wholesales units in FY22 to 8% in FY23 is another factor that could weigh on its consolidated margins in FY23, especially considering its U.S. EV sales will likely not qualify for consumer tax credits based on our current understanding of the Inflation Reduction Act.
Key Metrics
AS OF 17 Mar 2023| KRW bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Revenue | 75,265 | 82,487 | 80,577 | 94,143 | 113,718 |
| EBIT | 1,467 | 3,161 | 890 | 5,459 | 9,464 |
| EBIT Margin | 1.9% | 3.8% | 1.1% | 5.8% | 8.3% |
| EBITDA | 5,228 | 7,173 | 5,272 | 10,216 | 14,547 |
| EBITDA Margin | 6.9% | 8.7% | 6.5% | 10.9% | 12.8% |
| Total Liquidity | 17,050 | 15,975 | 17,082 | 19,745 | 26,639 |
| Net Debt | (8,350) | (6,749) | (4,453) | (5,202) | (11,035) |
| Total Debt | 6,995 | 7,628 | 10,920 | 12,569 | 12,940 |
| Gross Leverage | 1.3x | 1.1x | 2.1x | 1.2x | 0.9x |
| Net Leverage | -1.6x | -0.9x | -0.8x | -0.5x | -0.8x |
CreditSights View
AS OF 21 Jun 2023Our Outperform recommendation on Hyundai notes is based on relative value, expectations of growing market share in developed markets, its innovative EV product offerings that we believe should fuel further share gains, solid free cash flow generation, and resilient automotive profit margins. Hyundai targets increased light vehicle wholesales in 2023. While vehicle affordability concerns are expected to weigh on light vehicle demand in 2023, we believe Hyundai’s value-oriented light vehicle offerings could be somewhat insulated from affordability concerns and may benefit from a customer trade down effect. Hyundai and Kia are independent automakers that are aligned through cross-ownership, common governance structures and chairman, and joint ownership of captive finance subsidiaries.
Recommendation Reviewed: June 21, 2023
Recommendation Changed: January 13, 2023
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State Bank of India
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Fundamental View
AS OF 17 Mar 2023We continue to believe Nissan Motor Co. and Nissan Motor Acceptance Corporation (NMAC) notes should trade cheap for their rating owing to the company’s weak core automotive profitability, excluding currency, and credit ratings that remain on the brink of high yield. On February 7, 2023, S&P stated in a bulletin that it believes Nissan achieving EBITDA margins of 6% and positive free cash flow “remains challenging”. Although Nissan appeared to meet both performance thresholds in the most recent quarter, it was only with the benefit of favorable currency. Without the favorable currency, we believe automotive profitability would have remained negative in its two most recent quarters, EBITDA margin would have been below 6%, and free cash flow would have been much lower if not negative.
Business Description
AS OF 17 Mar 2023- Nissan, with headquarters in Yokohama, Japan, is a leading global automotive manufacturer with a market presence in many countries around the globe. The company’s growth investments are focused primarily on Japan, North America, and China, core markets with large profit pools in which Nissan has a meaningful market share. The company’s business in China is conducted through a joint venture with Dongfeng Motor Corporation.
- Nissan’s Sales Financing segment supports the sale of its vehicles by providing financing solutions to its customers and dealers. To enhance their creditworthiness, Nissan maintains keepwell (support) agreements with its wholly owned financial subsidiaries including Nissan Motor Acceptance Corporation (NMAC) in the United States and Nissan Financial Services (NFS) in Japan.
- The Renault-Nissan-Mitsubishi Alliance was established in 1999 to enhance member company scale in product development and raw material purchasing. The alliance includes equity participation, which led to Nissan holding ownership stakes in Renault (15% non-voting) and Mitsubishi (34%) and Renault holding an ownership stake in Nissan (43%). The Alliance’s automobile production volume is the third largest globally behind Toyota and Volkswagen.
Risk & Catalysts
AS OF 17 Mar 2023Management provides guidance for retail sales volumes but not for production volume or wholesales. It lowered its FY22 retail sales volume guidance for the second consecutive quarter to 3.4 mn units, down from a full-year target of 3.7 mn last quarter and its original target of 4.0 mn. Management indicated the lower target reflects continued industry headwinds from China COVID lockdowns, which have now largely ended, and semiconductor shortages, especially in North America.
The company reiterated its FY22 targets for revenue and operating profit based on modest changes in its currency outlook and the sustained strong pricing environment, partially offset by lower projected volumes. Management also highlighted improvement in raw material and logistics costs and noted it expects to offset the lower sales volume with improved productivity.
Management left its net income target unchanged. Net income is expected to decline sharply in FY22 owing to a Daimler share sale gain a year ago and a ÂĄ100 bn loss in the current fiscal year related to its exit from Russia. Absent these one-time items, management noted its FY22 net income would have significantly increased YoY.
Key Metrics
AS OF 17 Mar 2023| ÂĄ bn | FY18 | FY19 | FY20 | FY21 | LTM F3Q22 |
|---|---|---|---|---|---|
| Revenue | 10,377 | 8,716 | 6,843 | 7,393 | 8,750 |
| EBIT | 294 | (183) | (471) | (42) | 154 |
| EBIT Margin | 3% | (2%) | (7%) | (1%) | 4% |
| EBITDA | 667 | 183 | (199) | 252 | 498 |
| EBITDA Margin | 6.4% | 2.1% | (2.9%) | 3.4% | 8.0% |
| Total Liquidity | 1,595 | 2,795 | 4,096 | 3,601 | 3,289 |
| Net Debt | (1,600) | (1,065) | (636) | (728) | (1,094) |
| Total Debt | (290) | 430 | 1,260 | 973 | 495 |
| Gross Leverage | -0.4x | 2.3x | -6.3x | 3.9x | 1.0x |
| Net Leverage | -2.4x | -5.8x | 3.2x | -2.9x | -2.2x |
CreditSights View
AS OF 18 May 2023We maintain an Outperform recommendation on NSANY and NMAC notes based on the new Fitch rating that gives the entities two of three Investment Grade (IG) ratings, expected inclusion in the BofAML ICE IG index, near-term debt issuance expectations that we believe could provide an attractive entry point into the credit for IG investors, and relative value. While our primary credit concern for Nissan is its weak core automotive profitability, we expect this to improve in FY23 based on a 27% increase in retail sales (ex. China) despite headwinds from currency and lower sales financing profitability.
Recommendation Reviewed: May 18, 2023
Recommendation Changed: April 26, 2023
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State Bank of India
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Fundamental View
AS OF 17 Mar 2023Honda 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 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 2023Management 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 Metrics
AS OF 17 Mar 2023| ÂĄ bn | FY19 | FY20 | FY21 | FY22 | LTM F3Q23 |
|---|---|---|---|---|---|
| Revenue | 13,523 | 12,344 | 10,908 | 11,967 | 13,650 |
| EBIT | 719 | 578 | 576 | 741 | 832 |
| EBIT Margin | 5.3% | 4.7% | 5.3% | 6.2% | 7.4% |
| EBITDA | 1,403 | 1,216 | 1,175 | 1,334 | 1,487 |
| EBITDA Margin | 10.4% | 9.8% | 10.8% | 11.1% | 12.1% |
| Total Liquidity | 3,520 | 3,611 | 3,717 | 4,612 | 4,504 |
| Net Debt | (1,944) | (1,931) | (2,048) | (2,481) | (2,339) |
| Total Debt | 438 | 532 | 480 | 837 | 900 |
| Gross Leverage | 0.3x | 0.4x | 0.4x | 0.6x | 0.6x |
| Net Leverage | -1.4x | -1.6x | -1.7x | -1.9x | -1.6x |
CreditSights View
AS OF 18 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 18, 2023
Recommendation Changed: January 13, 2023
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Fundamental View
AS OF 17 Mar 2023Toyota 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. The company is the second-largest automotive issuer in the U.S. dollar market behind General Motors and accounts for 16% of automotive sector debt outstanding.
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.
Business Description
AS OF 17 Mar 2023- Toyota Motor Corp. (TMC) engages in the manufacture and sale of motor vehicles and parts. It operates through the following segments: Automotive, Financial Services, and All Other. The Automotive segment designs, manufactures, assembles and sells passenger cars, minivans, trucks, and related vehicle parts and accessories. It is also involved in the development of intelligent transport systems. The Financial Services segment offers purchase or lease financing to Toyota vehicle dealers and customers. It also provides retail leasing through lease contracts purchased by dealers. The company was founded by Kiichiro Toyoda on August 28, 1937 and is headquartered in Toyota, Japan.
- Toyota Financial Services Corporation (TFSC), a wholly owned subsidiary of TMC, oversees the management of Toyota's finance companies worldwide. Toyota Motor Credit Corporation (TMCC) is the company’s principal financial services subsidiary in the United States. Under terms of the credit support agreement between TFSC and TMCC, TFSC agrees to: (1) maintain 100% ownership of TMCC; (2) cause TMCC and its subsidiaries to have a tangible net worth of at least $100,000; (3) make sufficient funds available to TMCC so that it will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper. The terms of the credit support agreement between TMC and TFSC are very similar to the terms of the TFSC and TMCC credit support agreement.
Risk & Catalysts
AS OF 17 Mar 2023FY23 wholesales forecast reiterated at 8.8 mn units, up 7% YoY. Toyota trimmed its FY23 production target to 9.1 mn units from its previous target of 9.2 mn but maintained its projected wholesales at 8.8 mn units and its retail sales target at 10.4 mn units.
Wholesale shipments have shown steady improvement throughout FY23 and increased 9% sequentially and 16% YoY in F3Q23. Meeting its annual wholesale target requires 2.5 mn unit wholesales in F4Q23, or a 7% sequential increase, which seems achievable provided it increases production at a similar pace.
FY23 consolidated operating target unchanged but expected lower YoY. Management reiterated its FY23 consolidated revenue and operating income targets, with the revenue expected up 1% YoY and operating income down 6% YoY. Compared to last quarter, full year operating income is expected to benefit slightly less from currency and raw material cost moderation, but these negative variances are projected to be offset by lower marketing activities and slightly lower labor costs.
Key Metrics
AS OF 17 Mar 2023| ÂĄ bn | FY19 | FY20 | FY21 | FY22 | LTM 3Q22 |
|---|---|---|---|---|---|
| Automotive Revenue | 27,079 | 26,800 | 24,652 | 28,606 | 30,610 |
| EBIT | 2,039 | 2,124 | 1,778 | 2,519 | 2,135 |
| EBIT Margin | 7% | 7% | 7% | 8% | 6% |
| EBITDA | 3,036 | 2,946 | 2,654 | 3,526 | 3,245 |
| EBITDA Margin | 10.0% | 9.9% | 9.8% | 11.2% | 8.9% |
| Total Liquidity | 11,168 | 9,890 | 11,557 | 15,864 | n/m |
| Net Debt | (399) | (447) | 597 | (1,719) | (1,719) |
| Total Debt | 2,419 | 2,235 | 3,872 | 2,580 | 2,580 |
| Gross Leverage | 0.8x | 0.8x | 1.5x | 0.7x | 0.8x |
| Net Leverage | -0.1x | -0.2x | 0.2x | -0.5x | -0.5x |
CreditSights View
AS OF 18 May 2023Our Underperform recommendation on Toyota Motor Co. (TMC) and Toyota Motor Credit Corporation (TMCC) notes is based on relative value as tight trading levels offer little opportunity for outperformance. Toyota is the highest-rated global automaker that benefits from being the largest global automotive manufacturer, balanced geographic diversification, strong liquidity, consistent free cash flow generation, and solid credit metrics. The company has been hampered by supply chain challenges the past fiscal year, causing management to lower its production targets and dampening wholesale volumes and revenue. We expect global wholesale volumes to increase in 2023 as supply chain challenges ease and production schedules improve.Â
Recommendation Reviewed: May 18, 2023
Recommendation Changed: January 13, 2023
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Fundamental View
AS OF 17 Mar 2023Toyota Motor Credit Corp.’s (TMCC) delinquency rate rose above pre-pandemic levels, while charge-off rates also increased to normalized levels. The company expects higher credit losses in the retail loan portfolio due to higher average amounts financed and a higher percentage of used vehicles financed. These factors, coupled with the increase in the size of the retail loan portfolio, led TMCC to increase its provisioning for credit losses.
For additional information on Toyota Motor Corporation see Toyota.
Business Description
AS OF 17 Mar 2023- Toyota Motor Corp. (TMC) engages in the manufacture and sale of motor vehicles and parts. The Financial Services segment offers purchase or lease financing to Toyota vehicle dealers and customers. It also provides retail leasing through lease contracts purchased by dealers. The company was founded by Kiichiro Toyoda on August 28, 1937 and is headquartered in Toyota, Japan. In July 2000, the company established Toyota Financial Services Corporation (TFSC), a wholly owned subsidiary, to oversee the management of its finance companies worldwide.
- Toyota Financial Services Corporation (TFSC), a wholly owned subsidiary of TMC, oversees the management of Toyota's finance companies worldwide. Toyota Motor Credit Corporation (TMCC) is the company’s principal financial services subsidiary in the United States and is an indirect wholly owned subsidiary. Under terms of the credit support agreement between TFSC and TMCC, TFSC agrees to: (1) maintain 100% ownership of TMCC; (2) cause TMCC and its subsidiaries to have a tangible net worth of at least $100,000; (3) make sufficient funds available to TMCC so that it will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper. The terms of the credit support agreement between TMC and TFSC are very similar to the terms of the TFSC and TMCC credit support agreement.
Risk & Catalysts
AS OF 17 Mar 2023The company expects higher credit losses in the retail loan portfolio due to higher average amounts financed and a higher percentage of used vehicles financed. These factors combined with the increase in the size of the retail loan portfolio have led to TMCC’s increase in the provisioning for credit losses.
Future changes in the economy that impact the consumer and consumer confidence such as increasing interest rates and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could result in further increases to the allowance for credit losses.
Key Metrics
AS OF 17 Mar 2023| ÂĄ bn | FY19 | FY20 | FY21 | FY22 | F3Q23 |
|---|---|---|---|---|---|
| Total Company Earning Assets | 109,063 | 110,621 | 116,546 | 117,659 | 119,941 |
| Cash and Investments | 2,198 | 6,790 | 8,195 | 7,670 | 6,454 |
| Total Liquidity | 27,698 | 31,390 | 35,895 | 36,070 | 35,154 |
| Unsecured Debt | 80,521 | 83,172 | 85,513 | 82,288 | 78,589 |
| Secured Debt | 12,401 | 14,568 | 24,212 | 26,864 | 31,510 |
| Total Debt | 92,922 | 97,740 | 109,725 | 109,152 | 110,099 |
| Allowance % Retail Rece. | 0.56% | 0.85% | 1.60% | 1.63% | 1.81% |
| Allowance / Net Charge-offs | 1.09x | 1.58x | 4.50x | 6.68x | 3.77x |
| Net Charge-offs % Avg. Receivable | 0.52% | 0.55% | 0.39% | 0.26% | 0.49% |
| Delinquency Rate | 1.7% | 1.8% | 1.2% | 1.8% | 2.6% |
CreditSights View
AS OF 15 May 2023Our Underperform recommendation on Toyota Motor Co. (TMC) and Toyota Motor Credit Corporation (TMCC) notes is based on relative value as tight trading levels offer little opportunity for outperformance. Toyota is the highest-rated global automaker that benefits from being the largest global automotive manufacturer, balanced geographic diversification, strong liquidity, consistent free cash flow generation, and solid credit metrics. The company has been hampered by supply chain challenges the past fiscal year, causing management to lower its production targets and dampening wholesale volumes and revenue. We expect global wholesale volumes to increase in 2023 as supply chain challenges ease and production schedules improve.
Recommendation Reviewed: May 15, 2023
Recommendation Changed: January 13, 2023
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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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
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India