Bearish on sector
Given the risk of a global slowdown in auto demand, along with the fact that
consensus forecasts already appear to discount a significant market recovery,
we are changing our stance on the auto sector to Bearish from Neutral, and we
also remain Bearish on the auto parts sector. We think downside risk is
limited owing to the sharp decline in share valuations driven by rapid yen
appreciation, but lackluster fundamentals will likely prevent the sector from
outperforming TOPIX. Key regional investment themes include a longer-term
recovery in the U.S. auto market and the establishment of highly profitable
business models in China. As for individual stocks, we assign Overweight
ratings to Nissan Motor (upgraded from Neutral) and Honda Motor. We add
Nissan Motor to our Analyst Focus List because we believe the stock has not
priced in the prospect of long-term profit growth. In this report, we change our
ratings for Nissan Motor, Toyota Motor, and Suzuki Motor, and our price
targets for Nissan Motor, Toyota Motor, Honda Motor, Suzuki Motor, Fuji
Heavy Industries, and Yamaha Motor.
• Look for near-term slowdown in global auto demand
We estimate that worldwide automobile sales volume (annualized rate) hit a
new all-time record in August. However, we think sales volume was
temporarily boosted by government subsidies, tax incentives, and low interest
rates, and is probably not sustainable. We therefore believe global automobile
demand is likely to slow in the near term as the impact of purchase incentives
fades out in advanced industrialized economies and the pace of growth wanes
in emerging economies.
• 2Q preview: Companies see continued improvement in earnings
With automakers aggressively cutting costs and auto demand in advanced
industrialized markets rebounding sharply thanks to incentives, we look for
the recovery in automakers’ profits to accelerate in 2Q. We expect only
Toyota Motor, whose earnings are heavily dependent on sales in industrialized
markets, and Yamaha Motor, which still faces shrinking demand for its
mainstay motorcycles in the U.S. and Europe, to report operating losses in 2Q.
• Robust growth in domestic production to continue through 4Q 2009
We expect rising global auto demand coupled with inventory shortages in
some markets to fuel a continued recovery in domestic output through end-
2009. Domestic production, which fell 41% YoY to 1,712,000 units in 2Q
2009 as makers consolidated inventories, increased to 2,179,000 units in 3Q
(down 25% YoY). We look for output to accelerate to 2,418,000 units in 4Q
(down 7% YoY) and then edge up to around 2,461,000 units in 1Q 2010 (up
53% YoY).
Figure 1: Valuations