Automobile Industry Flashnote
3Q Preview: Earnings Head for Nadir, but Share
Prices Set to Bottom
Automobile Manufacture, Auto
Parts
Takaki NakanishiAC
(81-3) 6736-8600
takaki.x.nakanishi@jpmorgan.com
JPMorgan Securities Japan Co., Ltd.
See page 41 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
Nikkei 500 Autos and Auto Parts Index
800
1,300
1,800
2,300
2,800
3,300
07/1 07/7 08/1 08/7 09/1
Source: Datastream.
Approaching Bottom in Share Prices
• We maintain our Neutral stance on the auto sector, but we think that share price
performance is approaching a bottom. We advise being prepared to switch to a
buy stance. Honda Motor remains our top recommendation, and we rate Honda
and Suzuki Motor Overweight. We feel there are three vectors on which the
sector can be rerated upwards: (1) a ‘recovery model’ under which US
economic recovery generates margin improvement; (2) a ‘restructuring model’
under which cost structures are realigned; and (3) a ‘growth model’ whereby
environmental and technological transformation at the structural level provides
new growth opportunities.
US Cycle Likely to Turn Up Early
• US inventory adjustment will be complete around April–June, in our view. If the
US economy starts to recover from 2H 2009, we estimate that automobile
production will swiftly move to substantial production growth. However, even if
the US economy turns up, we only see the US SAAR picking up to the 12.5–13
million unit level, so not all manufacturers’ margins will benefit. We think that
Honda will be able to move to an expansionist drive based on this assumption,
and that it will be able to restore margins sooner than its peers.
We Expect ‘Restructuring Model’ to Have Beneficial Effects
• If demand remains structurally depressed, we are likely to see a growing gap
between different companies’ prospects for restoring margins according to
whether they can opt for the ‘restructuring model’ to bring down fixed costs.
The key for other firms to catch up with Honda’s performance out in front will
be the extent to which they can speedily and effectively adopt a ‘restructuring
model,’ in our view. The spotlight will be on what strategic options Toyota
Motor can take, given that we expect a top-line recovery, but that inflated fixed
costs are likely to hamper margin recovery.
Spotlight on Technology that Holds Key to Growth
• The so-called Green New Deal initiative designed to revive the global economy
by reforming society’s environment and energy structure may well accelerate
electrification of the automobile internal combustion engine. Our view is that the
automobile manufacturers’ current opportunities for growth lie in this new
secular course for society, the environment, and technology. It is still unclear
how long electrification will require and what form the de facto technology will
finally take, but we believe that hybrids will benefit at an early date as a
bridging technology.