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Japan
Automobiles Auto
2 March 2009
Auto Industry
Revised outlook for Honda,
Toyota, and Nissan
Kurt Sanger, CFA
Research Analyst
(+81) 3 5156-6692
kurt.sanger@db.com
Takeshi Kitaura
Research Associate
(+81) 3 5156-6738
takeshi.kitaura@db.com
Share prices appear to be looking beyond short-term
We have revised our sector macro views and earnings forecasts for Honda,
Toyota, and Nissan. The external environment remains harsh, although the weaker
yen is welcome. To us, the share prices appear to be acting rationally looking
through FY3/10 and attempting to price in FY3/11 and beyond. Given the recent
run-up from their lows, we expect shares to revert to more range bound trading.
We continue to prefer Honda for its business fundamentals.
Deutsche Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Companies featured
Nissan Motor (7201.T),¥295 Hold
Toyota Motor (7203.T),¥3,070 Hold
Honda Motor (7267.T),¥2,315 Buy
Global Markets Research Company
Global volume expected to decline another 9.5%
Decline in global demand has been fast and furious. Over the last three quarters
we estimate the daily sales rate has fallen by 50k units – roughly equivalent to the
annual output of 120 production lines. 4Q FY3/09 is likely to see the worst of the
declines before government stimulus programs have some impact. On our
scenario we expect global demand to continue to fall through 4QCY09, before
rebounding off an extremely low base in 1QCY10.
Core earnings variables – two negative, one positive
Given our global outlook, we continue to see volume as a major negative for
earnings in 1HFY3/10. While production cuts should make 4QFY3/09 the worst
period, continued decline in demand should keep retail sales negative into 3Q.
Supporting earnings should be a sharp decline in material prices, where we
estimate ¥50,000 per unit improvement. Currency will be a swing factor. We base
our estimates on ¥95/US$ versus an estimated average of ¥100/US$ in FY3/09.
We also look at company specific measures to reduce labor costs in the report.
Share price performance out of US recessions was mixed
We looked to history to assess the performance of cyclical auto shares during and
after the last five periods of US recession trying to determine the relevance of
stock selection. The performance has been anything put uniform for the J3
suggesting that stock selection will likely remain critical.
Honda Motor – preferred pick of J3
We have revised our FY3/09 and FY3/10 earnings outlook for Honda, Toyota, and
Nissan. We expect all makers to suffer further volume declines YoY, but to benefit
from material price declines and added cost cutting measures including reduced
labor and R&D expense. We expect Honda to stay in the black in FY3/10 at an OP
and NP level, while we project a slight NP at Toyota. FY3/09 EPS revisions: Honda
¥97 to ¥54, Toyota ¥27 to -¥101, and Nissan -¥77 to -¥268.
Valuation/Risk
We have adjusted our target price for Toyota (¥3,150 to ¥3,350) and Honda
(¥2,200 to ¥2,650) based on 5.5x EV/EBITDA FY3/11 (from FY3/10). Our target
price for Nissan (¥300 to ¥320) is set at 5.0x discount to its peers to reflect higher
operating risk levels. Risks to our outlook include forex, global unit sales levels,
material price trends, and potential charges in finance divisions.
Investment views
Sector view – Marketweight
The share prices, to us, appear to be acting rationally which is to say they are looking beyond
FY3/10 and attempting to price in a move to more normalized earnings. While the yen will
play a big part in determining what “normal” is, at current levels or expectations for midcycle
earnings levels are more like 4-5%, not 7-8% as seen over the last 10-years
(¥116/US$ average). The economic environment is expected to remain difficult and while
some form of recovery is currently expected from 2010, the speed and scale are
questionable. We should expect a return to more volatility in the space, but arguably with an
upward trajectory as the cycle improves somewhat.
Honda Motor – Buy, TP ¥2,650
Part of what we like about Honda is its simplicity as an automaker. It focuses its efforts on
four core auto products that account for over 70% of its unit sales and rank near the top in
their respective class. These products do not face pressure from some of the structural
issues we see in the industry with mix deterioration away from light trucks and luxury
products. Production is highly localized with only 27% of its non-minicar capacity in Japan.
They have a solid footprint in key developing markets and a hybrid growth strategy through
their motorbike operations. The shares have performed extremely well on a relative basis
over the past year, but we do not see a strong enough valuation argument for a competitor at
this point to offset our preference for Honda’s business model.
Toyota Motor – Hold, TP ¥3,350
Toyota looks to have substantial capacity to lower costs in the coming year as it cuts out
nonessential spending. Its balance sheet is serving it very well in this difficult time while its
high credit rating will likely allow it to add to its cash pile at attractive rates. We see the
company using its strengths to consolidate its operations and begin returning to profitability.
We believe these positives are largely reflected in the share price. Where our relative
concerns lie is in Toyota’s exposure to structural shifts in the sector as well as the scale of
certain challenges it faces. One of those is its domestic sales and production footprint. Its
production has grown through a web of subsidiary and affiliate production companies.
Realigning domestic production to meet lower demand levels and less favorable yen levels
while protecting employment will be difficult. Toyota’s exposure to the domestic non-mini
market where it held 46% market share in CY08 is also a risk in a period where our
economist expects the Japanese economy to contract by 8.6% through 2010.
Nissan Motor – Hold, TP ¥320
Nissan is in a defensive posture. Its historically lower cash reserves and higher utilization of
commercial paper have left it coping with cash flow management. We see positive signs that
Nissan will show progressive improvement in this area as sharp production cuts lower
inflated working capital and it secures new, longer-term funding. In its favor, the current crisis
situation is making the alliance with Renault refocus on its core concepts of commonality and
shared development. But what it has also done is cause the company, whether directly or
through decisions at Renault, to back-track on investment plans that were meant to support
its midterm growth namely in India and Morocco. We expect the focus on cost will get
Nissan back into the black by FY3/11, but we seek further clarity on future strategy.
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