The latest September data for the U.S. auto industry reiterates the car buyers’ love for Honda Motors (NYSE:HMC) as its sales surged 30% compared to the previous year helped by Civic, the new Accord and its luxury brand Acura. 
The automaker has been able to reinvent itself having suffered severely from supply chain constraints last year. This is one of the main reasons why we believe Honda will continue to do well and post strong North American sales while going deeper into the emerging economies. A strong top-line growth combined with an improvement in margins should boost the company’s profits in the long run.
We have a price estimate of $41 for Honda Motors, which is around 30% above the current market price.
- Why Honda Is Relaunching This Mid-size Pick-Up Truck In The U.S.
- Exploding Recall Costs Result In 22% Profit Decline For Honda in Fiscal Q3 Results
- Why Honda Kept Incentives Low In November
- Here’s What Will Drive Growth In Honda Motors
- Does Honda’s Increased Capital Expenditure Make Sense?
- Earnings Preview: Strong Trucks, Acura Performance Should Boost Honda’s Profits
Since almost 30% of Honda’s cars are produced in Japan, a strong Yen hurts the margins of its Japanese exports. Moreover, the depreciation of the South Korean Won against the U.S. Dollar in recent years gives companies such as Hyundai and Kia an edge. Thus, shifting the production overseas makes sense since the costs are incurred in Japanese Yen while revenue is earned in another currency. The company would also save on transportation costs by manufacturing cars locally.
Hence, the automaker is expanding its capacity in the U.S. and Canada while building a new plant in Mexico to reduce its dependence on Japanese exports. With this move, almost 96% of its total cars sold in the region will be made in North America once the plant in Mexico becomes functional in 2015, up from 85% currently. 
Similarly, in China, Honda along with its partners is building a new plant as well as expanding the capacity of its existing plants, which will see the production rise from 770,000 units presently to 1.01 million units by the end of 2014. Not only will the increased output feed the Chinese appetite for automobiles, but the region will also act as an export hub. 
Inroads into Emerging Economies to Benefit Top Line
Honda is pouring in $328 million in Indonesia to build a new automobile plant to boost production of its multi-purpose vehicles (MPV) such as Brio and Jazz. This will be Honda’s second plant in Indonesia. The new plant plant is scheduled to start production in 2014 and, once functional, it will triple Honda’s output to 180,000 vehicles from 60,000 currently. Besides, Indonesia is expected to overtake Thailand as the biggest biggest car market in Southeast Asia. Indonesian car sales grew 17% to 894,180 vehicles in 2011. 
In India, the automaker plans to accelerate the vehicle sales by introducing its first diesel car in the country by 2014. Honda is investing $600 million to commence production of a diesel-powered entry-level sedan. Honda’s Indian sales are seeing a slowdown due to the lack of diesel cars in its portfolio. With soaring gas prices, Indian customers are showing a predilection for diesel cars. Gasoline prices are deregulated while diesel is heavily subsidized in the country, thereby lowering the running cost of the vehicle.
We also expect the automaker’s focus on strengthening its portfolio of cheaper cars to benefit its top-line. The new version of Fit (or Jazz as it is known in some countries) will be launched next year. An SUV under the Fit range of cars will be rolled out as well. In Japan, it plans to strengthen its mini-car lineup by launching six new models by 2015.
However, the tensions between China and Japan over the disputed islands has given rise to an anti-Japanese sentiment in China. If the tensions persist, Japanese automakers are bound to lose sales. Honda and its joint ventures have sold a total of 476,000 vehicles in China this year through August, representing about one-sixth of its global sales. Notes: