Honda Forecast Trails Estimate as Yen Benefits Fade

Honda Motor Co. (7267), Japan’s third-largest carmaker, forecast a full-year profit that missed analysts’ estimates, as benefits from a weaker yen fade and it increases incentives in the U.S.

Net income may increase to 595 billion yen ($5.81 billion) in the 12 months ending in March 2015, from 574.1 billion yen a year earlier, the Tokyo-based automaker said in a statement today. That’s 14 percent below the 693 billion yen average of 19 analyst estimates compiled by Bloomberg.

Honda, this year’s worst performer among shares of Japan’s three biggest automakers, is facing headwinds as higher incentives failed to stem a slide in U.S. deliveries even as gains from a weaker yen fade. Sales also fell in China last month, the only major foreign automaker to record a decline in the world’s largest auto market.

“Since the beginning of the year, we began to worry about their sales in the U.S. market,” Masahiro Akita, an analyst with Credit Suisse Group AG in Tokyo, said by phone. “The competition is getting tougher and their incentive level is rising.”

While Honda has forecast lower-than-expected profit in the preceding two years, the gap hasn’t been this wide. A year ago, its 580 billion yen forecast was only 4 percent below the average estimate.

Honda rose 1 percent to 3,470 yen as of the close in Tokyo trading today, before the earnings announcement. The stock has declined 20 percent this year, the worst performer among Japanese carmakers, and compared with a 11 percent decline for the Nikkei 225 Stock Average.

Operating Profit

While Honda forecast operating profit will rise 1.3 percent to 760 billion yen, it was 15 percent below the average analyst estimate. It forecast revenue of 12.75 trillion yen, missing analysts’ estimate of 12.93 trillion yen.

In the January-March quarter, Honda’s net income more than doubled to 170.5 billion yen as the company benefited from a weaker yen. Operating profit rose 22 percent to 165.3 billion yen.

Honda, the most dependent among the three-biggest Japanese automakers on U.S. sales, has been a beneficiary from Prime Minister Shinzo Abe’s economic policies, which helped weaken the country’s currency by about 18 percent against the dollar in 2013 and fueled the biggest rally of the Nikkei since 1972.

A weaker yen increases the value of repatriated earnings and is giving Japanese carmakers an edge over rivals including General Motors Co. (GM) and Hyundai Motor Co.

Yen Edge

That advantage is waning as the yen has risen 2.9 percent against the dollar this year. The Japanese currency will weaken to 110 versus the dollar by the end of 2014, according to the average estimate compiled by Bloomberg. It traded at 102.36 yen as of 3.14 p.m. in Tokyo today.

Honda based its profit outlook on an exchange rate of 100 yen against the dollar, it said today.

Before Abe, the Japanese currency had hobbled exporters for years, appreciating to a postwar high of 75.35 to the dollar in October 2011 from about 115 in a four-year period. The yen began tumbling in late 2012 as polls showed Abe, who called for unprecedented monetary-easing policies that could weaken the currency, would lead his Liberal Democratic Party to a win in the nation’s parliamentary elections.

Honda’s mid-term global sales target of 6 million units is looking “very challenging,” Executive Vice President Tetsuo Iwamura said today in a briefing in Tokyo.

The automaker will be banking on its slate of new compact cars to improve its fortunes.

The Fit compact was redesigned in September and the latest model outsold Toyota’s Aqua -- known as the Prius c overseas -- to become Japan’s best-selling car in the October-to-December quarter. It also started to sell the Vezel crossover in Japan.

Retooled Fit

Honda began production of the retooled Fit at its new Mexico plant in February. The company is counting on the model to grab market share from General Motor Co.’s Chevrolet Sonic hatchback and Ford Motor Co.’s subcompact Fiesta.

Still, the carmaker faces potential setbacks with its new models after announcing recalls of the Fit Hybrid and Vezel hybrid vehicles to fix problems with its seven-speed transmission system.

“It is unusual for a newly launched model to be the subject of this many consecutive recalls,” Koichi Sugimoto, an auto analyst at Mitsubishi UFJ Morgan Stanley Securities Co., wrote in a report this month. “We still think there is a risk that the recalls will impact orders, including orders for the Vezel hybrid SUV.”

In North America, operating profit rose 39 percent to 290.9 billion yen last fiscal year.

U.S. Incentives

Honda, whose ratio of sales in the U.S. is the highest among Japan’s three biggest carmakers, saw its average incentives in the U.S. surge 42 percent to $2,010 in the January-to-March period, compared with an 11 percent rise at Toyota and the industrywide average of a 7.4 percent increase, according to market researcher Autodata.

The rise in incentives hasn’t stopped Honda sales from falling for three straight months. The automaker sold 133,318 Honda and Acura models in March, down from 136,038 a year ago, led by a 7 percent drop in sales of the Accord.

The Accord, traditionally the second best-selling car in the U.S. after Toyota’s Camry, fell to third place behind Nissan’s Altima in the first quarter.

“In the U.S., expectations that gasoline prices will stay low are making light trucks more popular again,” Sugimoto wrote in a report this month. “We expect sales to slow for flagship passenger models such as the Honda Accord, which is well regarded for its fuel economy.”

Sugimoto on April 16 cut his rating for Honda to neutral from outperform and lowered the target price to 3,800 yen from 5,700 yen.

Accord Sales

Accord sales fell in China at the start of this year because its price deterred buyers, Honda’s China chief, Seiji Kuraishi, said during the Beijing motor show this week. Orders increased after the company introduced two cheaper variants at the end of February, he said.

Operating profit rose 20 percent to 214 billion yen in Japan last fiscal year.

Honda, which introduced its N-series mini vehicles in 2011, saw minicar sales jump 20 percent last fiscal year. Two-fifths of cars sold in Japan are minicars with engines smaller than 0.66 liters. Total domestic sales of Honda rose 18 percent to 848,379 units.

Vehicle sales face a 16 percent drop this year, the Japan Auto Manufacturers Association has estimated, as a sales tax rise that began from April 1 damps demand for big-ticket items.

China Sales

Momentum in China has also slowed. Deliveries in March fell 2 percent, the only foreign automaker to record a decline in the world’s largest auto market.

Honda’s sales rose 26 percent last year to a record, as a consumer backlash eased over a territorial dispute between Japan and China. Sales were fueled by the Jade wagon and Crider sedan, the company’s first models tailored for the Chinese market.

Honda expects sales to rise at least 19 percent to more than 900,000 vehicles in China in 2014. The carmaker plans to introduce nine new or revamped models in 2014 and 2015 in the country as it seeks to catch up with Nissan and Toyota.

Honda showed a new concept hatchback designed exclusively for China at this week’s Beijing motor show to attract young Chinese buyers. It will also introduce a locally made compact hybrid model in 2016, President Takanobu Ito said at the show.

In Asian markets excluding Japan, operating profit rose 48.5 percent to 217.9 billion yen.

Asia Demand

In Thailand, Honda’s deliveries plunged 32 percent to 163,313 units last fiscal year, as the end of government incentives for first-time car purchases drove down demand.

In India, Honda bucked the industrywide slowdown to boost sales by 83 percent to 134,339 units, helped by the new Amaze and City small cars.

Honda recorded an operating loss of 17.1 billion yen in Europe, swinging from a profit a year earlier.

Deliveries fell 7 percent to 145,160 units last fiscal year in the region. Honda has decided to close one of the two production lines at its U.K plant from this autumn and cut 10 percent of its workforce, as the company expects no growth in Europe in the next two to three years.

Honda forecast motorcycle sales to rise 7.2 percent to 18.24 million units, and for vehicle deliveries to climb 12 percent to 4.83 million in the current fiscal year.

To contact the reporters on this story: Ma Jie in Tokyo at jma124@bloomberg.net; Yuki Hagiwara in Tokyo at yhagiwara1@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net Chua Kong Ho

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