Fitch Ratings: Honda's Q1 Bike Sales Fall Highlights Lower Demand, Trade War
08/08/2019 16:01
(The following statement was released by the rating agency) Fitch Ratings-Tokyo/London/Chicago-August 08: Honda's sales decline in the motorcycle segment underscores increasing challenges faced by the sector, including macroeconomic headwinds, trade war, increased competition and stricter regulation in certain markets, Fitch Ratings says. Nevertheless, the segment remains vital for the company's credit standing given its resilient revenue and high margin compared to the auto business. Last week Honda (A/Stable) reported an 8% unit sales decline in the motorcycle segment in 1Q20 (year ending in March 2020), reflecting softer demand, especially in India where tighter credit conditions led to a unit sales drop of 20%. The segment's revenue declined by 4% y-o-y, while EBIT decreased by 24%. The pressures in the motorcycle sector were among the key factors in the Fitch's revision of Harley-Davidson's 'A' Rating Outlook to Negative from Stable in April. These included weakening economic conditions in certain end markets, higher raw material prices and increased tariffs on imported motorcycles in some markets. Weakness in the company's motorcycle segment persisted in April-June 2019 when revenue and earnings dropped by 6% and 26%, respectively. Other competitors, including Yamaha and Kawasaki, also reported declining demand and earnings. We expect Honda's motorcycle segment to continue generating resilient earnings compared to the auto segment. Revenue and EBIT may recover in the latter half of FY20 if sales in India rebound in line with Honda's projections. However, the strong performance in FY18-19 could be difficult to sustain in view of the challenges ahead. Stricter emission regulations in emerging markets put pressure on margins due to the higher costs of developing and producing electric motorcycles. The Indian government's push for the electrification of most new bikes by 2025 is a case in point. Although manufacturers, including Honda, questioned this timeline, Honda is reportedly considering an electric two-wheeler project for the local market and partnerships on battery swapping technology and charging infrastructure. Against the backdrop of declining demand, competition is intensifying. In India, the largest market for two-wheelers, Honda faces a strong domestic rival, Hero MotoCorp. In the Philippines, a fast growing market, Yamaha has expanded rapidly and reached a 34% market share compared to Honda's 37%, according to Nikkei. Yamaha is doubling its annual production capacity in the country to 800,000 units. Yamaha is also seeking to grow in Vietnam, where Honda hopes to accelerate growth to offset weaker sales elsewhere. We believe there are increasing downside risks to revenue and margins in Honda's motorcycle segment. However, these risks could be offset by the company's record of highly efficient mass production, its ability to meet changing consumer needs through product innovation, and competitive pricing. Thanks to its strong capabilities in electrical vehicles, the company may eventually benefit from stricter regulation of motorcycles, which would weed out competition. In our view, the segment will therefore continue to underpin Honda's credit profile. Honda has strengthened its position in motorcycles over the past ten years, growing revenue by 7% (CAGR), compared to Yamaha's 3%. The segment's EBIT margin improved to almost 14% in FY19, driven by highly efficient production and tight cost control, compared to Yamaha's margin of 5% in 2018. This stronger performance in motorcycles helps offset greater volatility in the auto segment. This supported Honda's earnings and cash flows during the financial crisis when EBIT margin in autos dropped to almost zero, while it stayed above 5% in motorcycles.