25 November 2008
Japan Auto Assemblers
Cutting earnings and TP for
JBig3 as macro factors bite
Kurt Sanger, CFA
Research Analyst
(+81) 3 5156-6692
kurt.sanger@db.com
Further step down on forex and total demand
We have cut our earnings outlook at Toyota, Honda, and Nissan to reflect more
harsh macro assumptions. In the backdrop are potential positives from improving
US market share prospects to lower material prices and historic valuations, but
until we see some stability focus will remain on the negatives.
Deutsche Securities Inc.
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LOCATED IN APPENDIX 1.
Forecast change
Companies featured
Nissan Motor (7201.T),¥346 Hold
Toyota Motor (7203.T),¥3,130 Hold
Honda Motor (7267.T),¥2,090 Buy
Global Markets Research Company
Lower US and global volumes and stronger yen a difficult mix
We have cut our earnings outlook for J3 after applying more harsh forex (¥95/US$
from ¥100/US$) and volume assumptions (US market CY09 12m down from
13.2m, global market -6%). The one bright spot going into FY3/10 should be
material prices. After five years of progressively harsh increases, we estimate a
¥30,000 per unit positive impact from lower input prices and this is without
making an aggressive assumption on steel price negotiations.
Earnings revision: FY3/09 2H harsh, FY3/10 unlikely to bring rebound
We have cut our FY3/09 and FY3/10 earnings assumptions on weaker volume and
less favorable forex. We see Toyota (FY3/09 EPS ¥323 down to ¥176) and Nissan
(FY3/09 EPS ¥62 to ¥27) struggling to breakeven in 2H, while we expect Honda
(FY3/09 EPS ¥286 to ¥236) to also see a sharp YoY decline. FY3/10 earnings are
expected to be down YoY for all three as volumes and forex outweigh favorable
material price trends. We have revised as follows; Toyota (¥294 to ¥157), Honda
(¥249 to ¥167), and Nissan (¥53 to ¥9).
US: short-term disruptions negative for all; mid-to-long-term gains likely
The potential for bankruptcy for one or more of the US makers should be viewed
negatively, as we see the disruptions in the supplier base making life difficult for
all. Looking beyond that, the potential for market share gains are positive. This is
potentially significant, but we do not expect the market to focus on the positives
until the scale of the problems in the supply base are clearer. A positive resolution
of the current government negotiations that avoids this should help share prices.
Financial assets – what do they have for a rainy day?
We look at the breakdown of financial assets by company including marketable
and investment securities. Toyota simply has an impressive financial reserve of
salable assets of ¥5.6tr not even including its core affiliates. Honda is well enough
off with approximately ¥1.14tr in cash and investment securities, while the market
value of Renault shares suggests a heavy discount to Nissan’s listed assets.
Valuation/Risks
We have cut our target prices on a lower earnings outlook. We have moved our
valuation basis to EV/EBITDA and PBR from PER. While PER is most useful in
more stable environments while currently we feel the need to be more concerned
with asset quality. We have cut our target price on Toyota (¥3,900 to ¥3,350),
Honda (¥3,000 to ¥2,475) based on 4.0x EV/EBITDA. Our target price for Nissan
(¥560 to ¥385) is set at a sector discount of 3.5x 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.