Weak China Sales Force Downward Revision For Honda

by Trefis Team
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Honda Motors (NYSE:HMC), Japan’s third largest automobile company, reported its Q3 earnings on January 31. Its consolidated revenues jumped 25% to 2,426 billion Yen or $26.4 billion at current exchange levels while operating income tripled to 132 billion yen ($1.45 billion). Net income surged 62% to 77.4 billion Yen ($850 million). Honda’s automobile sales were up 26% to 986,000 units on year-on-year (y-o-y) basis. Note that sales as well as margins were hurt badly last year due to production and supply chain disruptions caused by natural calamities in Japan and Thailand. [1]

The automaker continued its impressive recovery in North America with sales up 26% to 1.24 million units. North America is Honda’s biggest market and currently accounts for more than 45% of the unit sales. Contributing to the sales growth were the model refreshments of its best sellers Accord, Civic and the CR-V. In 2013 and beyond, the automaker plans to carry on the momentum with the help of a refreshed Fit and the ‘urban SUV’, showcased at the recently concluded Detroit auto show. [1]

On the other hand, the automaker cut its full year sales forecast to 4.06 million from 4.12 million, mainly on account of weak Chinese sales. At the start of 2012, the automaker was targeting sales of 750,000 units in the world’s most populous nation. But tensions between China and Japan sparked over claims to islands in East China Sea led to sales decline in the country. Honda sold 604,000 units in China in 2012. [2]

In the previous earnings call, Honda stated that it was confident that Chinese sales would normalize at the start of 2013. Moreover, Japanese auto companies had planned to win back Chinese customers with big discounts and cheap financing (especially with the Chinese new year coming up). However, the latest downward revision suggests that the situation may take more time to normalize than initially envisioned.

See our complete analysis for Honda stock here

Yen Boost For Japanese Companies

Japanese automakers, including Honda, could benefit from a weaker Yen in the coming months since the overseas profits soar when translated back to local currency. Moreover, a weaker yen would make the Japanese products cheaper for international customers, and can potentially boost exports.

Strong gains made by the Yen in the last few years had been eating up the profits of export-dependent Japanese companies and had made it increasingly difficult for them to price their products competitively. This in turn, led companies to shift their production overseas in order to mitigate the impact of a strong currency. Honda currently manufactures a fourth of its cars in Japan. [3]

Japan’s newly-elected Prime Minister, Shinzo Abe, has vowed to make the Japanese companies more competitive by devaluing the currency. A Dollar currently yields about 92 Yen, compared to about 78-80 in the October-December period. In line with these fluctuations, Honda now forecasts the fourth quarter (Jan-March) exchange rate to be about 85 Yen, up from 81 Yen in the current quarter.

Our price estimate of $36 for Honda’s stock is about 5% below the current market price. We are in the process of revising our estimate to incorporate the latest earnings report.

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Notes:
  1. Honda Q3 Earnings [] []
  2. Honda trims full-year profit forecast, says China sales poorer, January 31, 2013, reuters.com []
  3. Honda Motors Production []
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